Figure 15.2
-Refer to Figure 15.2. If the economy is currently producing at point A and the Fed decreases the money supply, the economy will move to Point _______ in the short run and to Point _______ in the long run.
A) E; D
B) D; E
C) C; B
D) B; C

Question

Figure 15.2
-Refer to Figure 15.2. If the economy is currently producing at point A and the Fed decreases the money supply, the economy will move to Point _______ in the short run and to Point _______ in the long run.
A) E; D 
B) D; E 
C) C; B 
D) B; C

Quizplus · Accepted Answer

If the Fed decreases the money supply, it will lead to a decrease in aggregate demand, causing a shift from AD1 to AD2. In the short run, the economy will move to Point D with a lower price level and lower output. In the long run, prices will fully adjust, and the economy will move to Point E with a lower price level and potential output. Therefore, the correct answer is B.

Figure 15.2 -Refer to Figure 15.2. If the Economy Is Currently Producing