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Figure: Monetary Policy and the AD-SRAS Model
-(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will _____, SRAS will shift _____, real GDP will _____, and the price level will _____.
A) increase; to SRAS'; decrease; increase
B) increase; to SRAS'; increase; decrease
C) decrease; farther to the right; decrease; increase
D) decrease; to SRAS'; increase; decrease

Question

Use the following to answer questions:
Figure: Monetary Policy and the AD-SRAS Model 
-(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will _____, SRAS will shift _____, real GDP will _____, and the price level will _____.
A) increase; to SRAS'; decrease; increase 
B) increase; to SRAS'; increase; decrease 
C) decrease; farther to the right; decrease; increase 
D) decrease; to SRAS'; increase; decrease

Quizplus · Accepted Answer

An open market purchase increases the money supply and shifts the AD curve to the right, leading to an increase in real GDP and the price level in the short run. However, in the long run, nominal wages adjust to the higher price level, shifting the SRAS curve to the left until the economy returns to its natural level of output. As a result, nominal wages will increase, SRAS will shift to the right, real GDP will decrease, and the price level will continue to increase. This is represented by movement from point h to point g in the figure.

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