Suppose that the economy is operating at potential output and the money supply increases. Aggregate output will _____ potential output, nominal wages will _____, and the SRAS will shift _____.
A) rise above; rise; leftward
B) fall below; rise; leftward
C) rise above; fall; leftward
D) rise above; rise; rightward

Question

Quizplus · Accepted Answer

When the economy is operating at potential output and the money supply increases, aggregate output will temporarily rise above potential output due to increased spending. This leads to higher demand for labor, which pushes nominal wages up. As nominal wages increase, the cost of production for firms increases, leading to a leftward shift in the Short-Run Aggregate Supply (SRAS) curve as it becomes more expensive to produce goods and services at every price level.

Suppose That the Economy Is Operating at Potential Output and the Money