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,this would best be represented by a movement from

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,this would best be represented by a movement from

Quizplus · Accepted Answer

The correct answer is A because a negative demand shock would shift the AD curve to the left, causing real GDP to fall below potential GDP and the unemployment rate to rise. The central bank would then respond by increasing the money supply, which would shift the AD curve back to the right, restoring full employment and potential GDP.

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