-In the above figure, if we start at AD1 and SRAS1, and the money supply increases unexpectedly, what causes the economy to get to the long-run equilibrium?

Question

Quizplus · Accepted Answer

An unexpected increase in the money supply initially moves the economy to a point where output is above its natural rate, leading to higher demand for labor and thus higher wages. Over time, as people adjust their expectations, the short-run aggregate supply (SRAS) shifts leftward to return the economy to its natural rate of output, but at a higher price level.

-In the Above Figure, If We Start at AD1 and SRAS1