Use the figure below to answer the following question(s).
Figure 14-9

AD₁ and SRAS₁ indicate the initial conditions in an economy,with the current level of output,Y₂,being the full employment level,and the current price level being P₁.
-Refer to Figure 14-9.If the Fed unexpectedly increases the money supply,in the long run,the impact of the unanticipated expansionary policy will be a movement to
A)P₁ and Y₂.
B)P₂ and Y₁.
C)P₂ and Y3.
D)P₃ and Y₂.

Question

Use the figure below to answer the following question(s).
Figure 14-9
  
AD₁ and SRAS₁ indicate the initial conditions in an economy,with the current level of output,Y₂,being the full employment level,and the current price level being P₁.
-Refer to Figure 14-9.If the Fed unexpectedly increases the money supply,in the long run,the impact of the unanticipated expansionary policy will be a movement to
A)P₁ and Y₂. 
B)P₂ and Y₁. 
C)P₂ and Y3. 
D)P₃ and Y₂.

Quizplus · Accepted Answer

An unexpected expansionary policy by the Fed will shift AD₁ to the right, resulting in an increase in both output (Y) and the price level (P) in the short run. However, in the long run, the increase in the money supply will cause inflationary expectations among households and businesses, leading to an upward shift of the SRAS curve. As a result, the economy will move from point A to point C, where output remains at the full employment level (Y₂) but the price level has increased to P₃. Therefore, the correct answer is D) P₃ and Y₂.

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