Figure: AD and Monetary Policy Refer to the figure. Suppose a given economy starts at point A in the figure. If the Fed engages in an expansionary monetary policy, what would you expect to happen in the short run?
A) Aggregate supply will decrease because of higher wages.
B) Aggregate demand will decrease because of higher interest rates.
C) Aggregate demand will increase because of lower interest rates.
D) The economy will move along the AD curve to a lower inflation rate.

Question

Figure: AD and Monetary Policy  Refer to the figure. Suppose a given economy starts at point A in the figure. If the Fed engages in an expansionary monetary policy, what would you expect to happen in the short run?
A) Aggregate supply will decrease because of higher wages. 
B) Aggregate demand will decrease because of higher interest rates. 
C) Aggregate demand will increase because of lower interest rates. 
D) The economy will move along the AD curve to a lower inflation rate.

Quizplus · Accepted Answer

When the Fed engages in an expansionary monetary policy, it increases the money supply and lowers interest rates. This stimulates borrowing and spending, leading to an increase in aggregate demand. This shift results in the economy moving to a higher level of output and a higher price level, along the AD curve towards point B. Therefore, the correct answer is C.

Figure: AD and Monetary Policy Refer to the Figure