Figure 4

-Refer to Figure 4 above.Assuming that Y₂ represents a level of national income lower than the full employment level, and that inflation has remained unchanged after the event that caused the IS curve to shift, what should the monetary authorities do if they wish to reduce unemployment?

Question

Figure 4
 
-Refer to Figure 4 above.Assuming that Y₂ represents a level of national income lower than the full employment level, and that inflation has remained unchanged after the event that caused the IS curve to shift, what should the monetary authorities do if they wish to reduce unemployment?

Quizplus · Accepted Answer

If Y₂ represents a level of national income lower than the full employment level, it means that the economy is facing a recessionary gap, which leads to higher unemployment. To reduce unemployment, the monetary authorities should increase the money supply, which would shift the LM curve down and shift the IS curve to the right, leading to an increase in national income and a decrease in unemployment. This policy is known as expansionary monetary policy. Reducing the money supply would have the opposite effect and would be contractionary monetary policy. Advising the government to raise taxes would decrease national income and increase unemployment, whereas advising the government to reduce taxes would increase national income and decrease unemployment, but this is fiscal policy, not monetary policy.

Figure 4 -Refer to Figure 4 Above.Assuming That Y₂ Represents a Level