Use the following figure to answer the questions : Figure 8.5: -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 equilibrium price level, the appropriate monetary policy lever would be to decrease aggregate demand (AD). One way to achieve this is to increase interest rates, which would discourage borrowing and spending, leading to a decrease in AD. Increasing the money supply would have the opposite effect, increasing AD and exacerbating inflation. Changing income taxes would also have a limited effect on AD and would not be an effective lever to address inflation.

Use the Following Figure to Answer the Questions : Figure