The Reserve Bank responds to an increase in unemployment caused by a decrease in the AS curve by lowering interest rates. This will
i. shift the aggregate demand curve rightward and raise the price level.
ii. shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices.
iii. result in lower employment and a higher price level.
A) i and ii
B) ii and iii
C) iii only
D) i only
E) i and iii

Question

Quizplus · Accepted Answer

Lowering interest rates is a monetary policy tool used by central banks to stimulate the economy. When the Reserve Bank lowers interest rates, it makes borrowing cheaper, encouraging spending and investment. This leads to an increase in aggregate demand (AD), shifting the AD curve rightward. The effect is an increase in both the price level and output, including potentially higher employment, not lower employment as stated in option iii. The policy does not directly shift the aggregate supply (AS) curve; thus, option ii is incorrect.

The Reserve Bank Responds to an Increase in Unemployment Caused