In the short run, a permanent increase in the domestic money supply causes
A) a greater upward shift in the DD curve than that caused by an equal, but transitory, increase.
B) a greater downward shift in the AA curve than that caused by an equal, but transitory, increase.
C) a smaller upward shift in the AA curve than that caused by an equal, but transitory, increase.
D) a smaller downward shift in the AA curve than that caused by an equal, but transitory, increase.
E) a greater upward shift in the AA curve than that caused by an equal, but transitory, increase.

Question

Quizplus · Accepted Answer

In the short run, a permanent increase in the domestic money supply causes a greater upward shift in the AA curve than that caused by an equal, but transitory, increase. This is because a permanent increase in the money supply leads to a permanent increase in output, which in turn leads to an increase in interest rates due to a higher demand for credit. The higher interest rates cause a greater upward shift in the AA curve than a transitory increase in the money supply, which only has a temporary effect on output and interest rates.

In the Short Run, a Permanent Increase in the Domestic