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Figure: Monetary Policy
-(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but overestimates how serious the recession is,then:
A) the LRAS curve would shift to the left.
B) the Fed would take the economy to point X.
C) the Fed would fail to stimulate the economy and it would remain at point Y.
D) the Fed would overshoot and the economy would move to point W.

Question

Use the following to answer questions 
Figure: Monetary Policy 
-(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but overestimates how serious the recession is,then:
A) the LRAS curve would shift to the left. 
B) the Fed would take the economy to point X. 
C) the Fed would fail to stimulate the economy and it would remain at point Y. 
D) the Fed would overshoot and the economy would move to point W.

Quizplus · Accepted Answer

If the Fed overestimates the severity of the recession and takes action accordingly, it would likely inject too much stimulus into the economy. This excessive stimulus could lead to an overheating of the economy, moving it beyond the full employment output to point W, where it would experience inflationary pressures.

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