Figure 12.1

-Refer to Figure 12.1...Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,the central bank response will result in a

Question

Figure 12.1

-Refer to Figure 12.1...Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,the central bank response will result in a

Quizplus · Accepted Answer

Since the economy experiences a negative demand shock, it will cause a shift in the IS curve from IS₁ to IS₂. To counteract the demand shock, the central bank will need to reduce interest rates, leading to a shift in the MP curve from MP₁ to MP₂. Therefore, the correct answer is B - shift from MP₁ to MP₂.

Figure 12.1 -Refer to Figure 12.1...Suppose the Economy Is Initially at Full