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.As a result of the Fed's policy response,the AD curve shifts to AD₃ in the short run.Which of the following is TRUE about the Fed's policy response? A) The Fed responded too little to the shock. B) The Fed responded too much to the shock. C) The Fed provided just the right amount of response to the shock. D) The Fed was too fast in responding to the shock.

Question

Quizplus · Accepted Answer

The Fed responded too much to the shock as the aggregate demand curve shifted to AD₃ in the short run, which resulted in an output level lower than the initial 3% growth rate.

Use the Following to Answer Questions 50-54