Multiple Choice
The principle of monetary neutrality implies that an increase in the money supply will increase:
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
Which of the following would shift the long-run aggregate supply (LRAS) curve but not the short-run aggregate supply (SRAS) curve?
A
A temporary wage increase
B
A change in the expected price level
C
An increase in the economy's capital stock
D
A rise in the price of oil
Verified step by step guidance1
Step 1: Understand the difference between the Long-Run Aggregate Supply (LRAS) curve and the Short-Run Aggregate Supply (SRAS) curve. The LRAS curve represents the economy's potential output when all resources are fully employed, and it is vertical because output is determined by factors like capital, labor, and technology, not by the price level. The SRAS curve is upward sloping because, in the short run, prices and wages are sticky, so output can vary with the price level.
Step 2: Identify what factors shift the LRAS curve. These include changes in the economy's productive capacity such as increases in capital stock, improvements in technology, or growth in labor force. These changes affect the potential output and thus shift the LRAS curve.
Step 3: Identify what factors shift the SRAS curve. These typically include changes in input prices (like wages or oil prices) or changes in expected price levels, which affect firms' production costs in the short run and thus shift the SRAS curve.
Step 4: Analyze each option: A temporary wage increase and a rise in the price of oil affect production costs and thus shift the SRAS curve but not the LRAS curve. A change in the expected price level affects the SRAS curve because it influences wage and price setting in the short run. An increase in the economy's capital stock increases productive capacity, shifting the LRAS curve but not the SRAS curve.
Step 5: Conclude that the factor which shifts the LRAS curve but not the SRAS curve is an increase in the economy's capital stock, because it changes the economy's potential output without affecting short-run price or wage stickiness.
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