In the AD-AS model,an unexpected increase in the growth rate of the money supply:
A) decreases both the inflation and real growth rates in the short run.
B) increases both the inflation and real growth rates in the short run.
C) decreases both the inflation and real growth rates in the long run.
D) increases both the inflation and real growth rates in the long run.

Question

Quizplus · Accepted Answer

An unexpected increase in the growth rate of the money supply is likely to lead to an increase in aggregate demand in the short run, shifting the AD curve to the right. This will lead to an increase in both the inflation and the real growth rates in the short run. However, in the long run, the increase in the money supply would lead to higher inflation expectations, causing the SRAS curve to shift up, resulting in an increase in inflation and a decrease in real growth rates.

In the AD-AS Model,an Unexpected Increase in the Growth Rate