In Figure 8.5,if this economy's inflation goal is a price level of P₂ but the equilibrium price level is P₃,an appropriate monetary policy lever would be to A)Decrease AS by increasing the money supply. B)Decrease AD by increasing interest rates. C)Decrease AD by increasing income taxes. D)Increase AS by increasing the money supply.

Question

Quizplus · Accepted Answer

To decrease the inflationary pressure caused by the equilibrium price level being higher than the target price level, the appropriate monetary policy lever would be to decrease AD by increasing interest rates. This would reduce aggregate demand and lead to a decrease in the equilibrium price level towards the target price level. Increasing AS by increasing the money supply or decreasing AD by increasing income taxes would not be the best choices in this scenario.