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Question 1 of 5

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Consider the following AS-AD model. The aggregate demand (AD) curve, short-run aggregate supply (SRAS) curve, and long-run aggregate supply (LRAS) curve are given in this graph.

The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

If the Federal Reserve increases the money supply, interest rates .

This shifts the money supply curve right, lowering the price of money (or interest rate). When money is more readily available, it costs less to borrow.
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The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

As a result, is most likely to be affected, and it .

Investment is the change in the capital stock, and the interest rate is the payment to capital. Cheaper capital means more is purchased.
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The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

then shifts .

Investment is part of AD, since AD = C + I + G + (X - M). Increases in investment shift the curve right.
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The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

In the short run, as a result, the aggregate price level and aggregate output , but in the long run .

Rightward shifts in the AD curve raise both aggregate price level and aggregate output in the short run. In the long run, AS shifts left and the intersection of LRAS and AD is at the original aggregate output level. The aggregate price increases that are caused by the AD shift eventually cause input costs throughout the economy to rise. This in turn shifts the AS curve left.
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If the Federal Reserve increases the reserve ratio, interest rates , aggregate demand then shifts , and aggregate output .

A higher reserve ratio lowers the money supply, because fewer loans can be made and the money multiplier is reduced. This has an opposite effect as compared to a monetary expansion.
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