Suppose that the State Bank announces an increase in the money supply. As a resu

Question

Suppose that the State Bank announces an increase in the money supply. As a result, people start to expect higher prices. What will happen to the short-run aggregate supply curve?

I put down that products with an inelastic demand will not be affected, while elastic demand products can show a decline or rise in consumption, depending on market expectations. If consumers know the market will show further decreases in prices, then Deflation can occur as individuals save their money in hopes for getting a better deal. In short, they will want to minimize consumer expense and maximize utility gained. Deflation can lead to a drop in the demand for products, and can lead to unemployment as goods will be in excess while demand will not be sufficient.

I have the general feeling that I'm missing something very important. If anyone could help to shed light on what I'm missing, I'd greatly appreciate it. Thanks in advance!

Explanation / Answer

because the short-run aggregate supply curve are usually horizontal, everything that you have down is correct. But the only thing that I would say is missing is because of the expectancy of higher prices, in the short-run only the output will be changed by the supply. You basically have the correct answer, there is no sense in repeating what you said. Great Job!

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