In the AD-AS model,an unexpected decrease in the growth rate of the money supply causes:
A) a rightward shift of the AD curve and then an upward shift of the SRAS curve.
B) a rightward shift of the AD curve and then a downward shift of the SRAS curve.
C) a leftward shift of the AD curve and then an upward shift of the SRAS curve.
D) a leftward shift of the AD curve and then a downward shift of the SRAS curve.

Question

Quizplus · Accepted Answer

An unexpected decrease in the growth rate of the money supply will lead to lower nominal incomes and prices. This will cause a leftward shift of the AD curve, as lower nominal incomes decrease consumption and investment spending. The decrease in the growth rate of the money supply will also cause a decrease in inflation expectations, leading suppliers to reduce prices, which will cause an upward shift of the SRAS curve. Therefore, the correct answer is D, a leftward shift of the AD curve and then a downward shift of the SRAS curve.

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