Explain the effect on the short-run aggregate supply (SAS) curve when an increase in the general level of money

The effect of an increase in the general level of money on the short-run aggregate supply (SAS) curve can be explained in the following steps:

1. Increase in Money Supply: When there is an increase in the general level of money, it means that there is more money circulating in the economy. This increase in money supply can come from various sources such as the central bank injecting more money into the economy, or from an increase in foreign investment.

2. Lower Interest Rates: An increase in money supply typically leads to lower interest rates. This is because when there is more money in the economy, banks have more funds to lend out, which reduces the cost of borrowing.

3. Increased Spending: Lower interest rates encourage businesses and consumers to borrow and spend more. This increase in spending stimulates demand for goods and services.

4. Increased Production: In response to the increased demand, firms increase their production to meet the higher level of demand. This increase in production is reflected in an outward shift of the SAS curve.

5. Inflation: However, if the economy is already operating at its full capacity, the increase in demand can lead to inflation. This is because when demand exceeds supply, prices tend to rise. In this case, the SAS curve might shift to the left, indicating a decrease in aggregate supply due to higher costs of production.

In conclusion, an increase in the general level of money can lead to an outward shift of the SAS curve in the short run due to increased production. However, if the economy is already at full capacity, it can also lead to inflation and a leftward shift of the SAS curve.