Use the following to answer questions 50-54: Figure: Monetary Policy and Demand Shocks -(Figure: Monetary Policy and Demand Shocks)Refer to the figure.In the figure,assume the initial real growth rate of the economy is 3% when a positive aggregate demand shock shifts the AD curve from AD₁ to AD₄.The correct monetary policy response is to: A) reduce money supply growth,so that the AD curve shifts back to AD₁. B) reduce money supply growth,so that the AD curve remains at AD₄. C) increase money supply growth,so that the AD curve shifts to AD₃. D) increase money supply growth,so that the AD curve shifts to AD₅.

Question

Quizplus · Accepted Answer

The correct monetary policy response to a positive demand shock is to reduce money supply growth so that the AD curve shifts back to its original position, AD₁. This is because the initial real growth rate of 3% is already considered strong economic growth, and allowing the AD curve to remain at AD₄ would only lead to inflationary pressure and overheating of the economy. Therefore, the best choice is A.

Use the Following to Answer Questions 50-54