Figure 14-3 -Suppose the economy was currently operating at SRAS and AD₂ in Figure 14-3. To combat inflation, the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the economy, AD has already moved to AD₁. Which of the following would be true? A)The policy would cause the economy to fall further into a recession than it would have if the Fed had not undertaken the policy. B)The policy will help by preventing the recession from becoming worse. C)The policy would cause the economy to go into an economic boom. D)This is a trick question; the impact of monetary policy is felt immediately by the economy.

Question

Quizplus · Accepted Answer

The restrictive monetary policy would decrease aggregate demand further, exacerbating the recession rather than preventing it.

Figure 14-3 -Suppose the Economy Was Currently Operating at SRAS and AD2

Figure 14-3 -Suppose the Economy Was Currently Operating at SRAS and AD₂