Use the figure below to answer the following question(s). Figure 14-5 In Figure 14-5, AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level, Y₁. The long-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be A) a decrease in aggregate demand to AD₂ and a decrease in real output to Y₂. B) a decrease in the full-employment level of output to Y₂. C) a decrease in aggregate demand to AD₂ and an increase in short-run aggregate supply to SRAS₂, causing the price level to fall to P₃ and real output to remain unchanged at Y₁. D) no change; AD and SRAS will stay at AD₁ and SRAS₁.

Question

Quizplus · Accepted Answer

The shift to a more restrictive monetary policy will decrease aggregate demand to AD₂. This decrease in aggregate demand will cause an increase in short-run aggregate supply to SRAS₂, causing the price level to fall to P₃. However, since the economy is initially operating at full-employment output level, Y₁, the decrease in aggregate demand will not cause a decrease in real output. Therefore, real output will remain unchanged at Y₁.

Use the Figure Below to Answer the Following Question(s)