Question

Suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping $SRAS$ curve. If policymakers wish to prevent the equilibrium price level from changing in response to the oil price increase, should they increase or decrease the quantity of money in circulation? Why?

Short answer

If policymakers want to avoid a change in the optimal price level in reaction to an increase in oil prices, they should reduce the amount of money in circulation.

Step-by-step solution

Step: 1 Equilibrium price:

In an organization with a skyward short-run aggregate supply curve, there is a momentary but considerable shift. If policymakers want to avoid a change in the optimal price level in reaction to an increase in oil prices, they should reduce the amount of money in circulation.

Step: 2 Conclusion:

From the above dicussion,so that

- As the money supply expands, individuals would have more wealth and want to spend it on more things, shifting the overall rightward.

- Because businesses must hire more employees, wages must rise, resulting in higher in cost and, as a result, price.

- As a result, employees demand higher wages in order to create more production and compensate for rising prices; as a result, the aggregate supply curve shifts to the left in the short run.