Self-Correction and the Money Market
In an economy experiencing a recessionary gap, self-adjustment through falling input prices eventually shifts the SRAS curve. What indirect effect does this process have on the money market?
A
Falling prices lead to a permanent increase in the money supply, which is reflected as a rightward shift in the money supply curve.
B
Falling input prices directly increase nominal wages, causing money demand to jump and interest rates to rise sharply.
C
The self-adjustment process solely affects the SRAS curve, having no impact on money demand or the equilibrium interest rate.
D
Falling prices increase the real value of a fixed nominal money supply, which reduces the transactions demand for money and leads to lower equilibrium interest rates.
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