Suppose the Central Bank of New Geneland decides to increase the country\'s mone

Question

Suppose the Central Bank of New Geneland decides to increase the country's money supply by 15percentage immediately and every year for the foreseeable future. Firms and workers in New Geneland expect this increase to the money supply and immediately raise all prices and wages by 15percentage and plan to do so every year. Which of the following would be true of the economy of New Geneland under the AD/AS/IS/LM model? The LM curve would shift out. The AD curve would shift in. Output would increase. The nominal interest rate would rise.

Explanation / Answer

As the price level increases the national income decreases. Thus  a increase in the price level induces consumers to save more, thereby decreasing the aggregate demand and AD curve will shift inward. Hence correct option is (b)

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