Suppose that there is a temporary, but significant,increase in oil prices in an economy with an upward-sloping SRAS curve. If policy makers 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

YES

In order to determine whether policy makers should increase or decrease the quantity of money in circulation to prevent the equilibrium price level from changing in response to the temporary increase in oil prices, we need to analyze the relationship between the money supply, aggregate demand (AD), and the short-run aggregate supply (SRAS) curve.

When there is a temporary increase in oil prices, it would result in higher production costs for businesses. As a result, the SRAS curve shifts leftward, indicating a decrease in aggregate supply in the short run. This leads to a higher equilibrium price level and a lower level of output.

To prevent the equilibrium price level from changing, policy makers can manipulate aggregate demand through monetary policy, which involves adjusting the quantity of money in circulation.

If policy makers want to keep the equilibrium price level stable, they should increase the quantity of money in circulation. Increasing the money supply would lead to an increase in aggregate demand (AD). This increase in AD would counteract the decrease in aggregate supply caused by the higher oil prices, helping to maintain the original equilibrium price level.

By increasing the quantity of money in circulation, policy makers can lower interest rates, making borrowing and spending more attractive for consumers and businesses. This increased spending would boost aggregate demand, helping to offset the negative impact of higher oil prices on aggregate supply.

So, in summary, to prevent the equilibrium price level from changing in response to a temporary increase in oil prices, policy makers should increase the quantity of money in circulation to stimulate aggregate demand and counteract the decrease in short-run aggregate supply.