Figure 8-6

-In Figure 8-6 above,a contractionary monetary policy with no change in inflationary expectations takes us along path
A)A.
B)H.
C)G.
D)F.
E)E.

Question

Figure 8-6
 
-In Figure 8-6 above,a contractionary monetary policy with no change in inflationary expectations takes us along path
A)A. 
B)H. 
C)G. 
D)F. 
E)E.

Quizplus · Accepted Answer

As shown in the figure, a contractionary monetary policy leads to a decrease in real output and an increase in the interest rate. This takes the economy from point E to point F. Since there is no change in inflationary expectations, the short-run aggregate supply curve remains the same. Therefore, output decreases and the price level remains the same, moving the economy upwards along the vertical aggregate supply curve until reaching point D. Therefore, the correct choice is D.

Figure 8-6 -In Figure 8-6 Above,a Contractionary Monetary Policy with No Change