Suppose in a given economy, we start at Point A as shown 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 lower 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

Suppose in a given economy, we start at Point A as shown 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 lower 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

An expansionary monetary policy is designed to stimulate economic growth by increasing the money supply and lowering interest rates. This will lead to an increase in aggregate demand as households and firms are more willing to spend and invest. As a result, the economy will move along the AD curve to a higher level of output and prices in the short run.

Suppose in a Given Economy, We Start at Point a as Shown