-Refer to Figure 16-1.Suppose a demand shock causes output to rise above full employment and increases money demand from $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$ to $\mathrm { M } _ { 2 } ^ { \mathrm { D } }$ .If the Fed wants to maintain the interest rate at r?,it will
A) use a constant monetary supply policy
B) increase the money supply,which will increase aggregate demand and increase output further in the short run
C) increase the money supply,which will increase the price level,decrease aggregate demand,and lower output back to full employment
D) decrease money demand,decrease the interest rate,and decrease aggregate demand until output returns to full employment
E) be unable to meet its interest rate target without causing a recession.

Question

-Refer to Figure 16-1.Suppose a demand shock causes output to rise above full employment and increases money demand from $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$ to $\mathrm { M } _ { 2 } ^ { \mathrm { D } }$ .If the Fed wants to maintain the interest rate at r?,it will
A) use a constant monetary supply policy 
B) increase the money supply,which will increase aggregate demand and increase output further in the short run 
C) increase the money supply,which will increase the price level,decrease aggregate demand,and lower output back to full employment 
D) decrease money demand,decrease the interest rate,and decrease aggregate demand until output returns to full employment 
E) be unable to meet its interest rate target without causing a recession.

Quizplus · Accepted Answer

To maintain the interest rate at r?, the Fed would need to increase the money supply to match the increased money demand, which would further increase aggregate demand and output in the short run.

-Refer to Figure 16-1 M1D\mathrm { M } _ { 1 } ^ { \mathrm { D } }M1D​

-Refer to Figure 16-1 $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$