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Figure: Negative Supply Shock
-(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.If the Fed reacts by increasing money growth by 3%,this would take the economy to:
A) point A.
B) point B.
C) point X.
D) point V.

Question

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Figure: Negative Supply Shock 
-(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.If the Fed reacts by increasing money growth by 3%,this would take the economy to:
A) point A. 
B) point B. 
C) point X. 
D) point V.

Quizplus · Accepted Answer

A negative supply shock leads to a decrease in output and an increase in the price level, causing the economy to move from point A to Y. If the Fed reacts by increasing money growth, it can shift the AD curve to the right, increasing output and the price level. However, increasing money growth by 3% may not be sufficient to bring the economy back to its initial point A or B. Point X is a possible outcome with an increase in output and a higher price level, but not as high as point A or B. Point V is not a feasible option as it is beyond the long-run aggregate supply (LRAS) curve, meaning it would require constant increases in the money supply to maintain. Therefore, the best choice is C, as it represents a plausible outcome after the Fed's intervention.

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