Suppose that from an initial AD/SAS/LAS intersection,the money supply grows by six percent.At the same time,the nominal wage rises by ten percent.As a result,output will be ________ the natural GDP,with a price level ________.
A)below,10 percent lower
B)below,10 percent higher
C)below,between 6 and 10 percent higher
D)above,that is unchanged
E)above,between 6 and 10 percent higher

Question

Quizplus · Accepted Answer

When the money supply grows by six percent, it typically leads to an increase in aggregate demand, which would push the price level up and increase output. However, if nominal wages rise by ten percent, this increases production costs, which can shift the aggregate supply curve to the left, increasing the price level further but reducing output. Therefore, output will be below the natural GDP because of the higher production costs, and the price level will be higher, but not as high as a ten percent increase in nominal wages might suggest, because the increase in the money supply also plays a role in determining the price level. The exact price level increase would depend on the relative shifts of the demand and supply curves but is expected to be between 6 and 10 percent higher.

Suppose That from an Initial AD/SAS/LAS Intersection,the Money Supply Grows