Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as A) policymakers refrain from using discretionary policies. B) workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. C) economic agents do not respond to falling prices by increasing aggregate demand back to AD₁. D) producers do not increase the price of their output.

Question

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The Answer of Figure 17-2 -Refer to Figure 17-2. The economy is initially in equilibrium at point (1). Now suppose a reduction in the money supply causes aggregate demand to fall to AD₂. The below potential output level of Y₂ will exist as long as A) policymakers refrain from using discretionary policies. B) workers fail to recognize that their real wages have increased and that they need to accept lower nominal wages. C) economic agents do not respond to falling prices by increasing aggregate demand back to AD₁. D) producers do not increase the price of their output.

Figure 17-2 -Refer to Figure 17-2. the Economy Is Initially in Equilibrium