Refer to the following figure to answer the next two questions:

-According to the figure,if the economy started at full-employment output,contractionary monetary policy would cause real gross domestic product (GDP) to __________ in the short run.
A) increase from Y1 to Y₂
B) increase from Y₁ to Y₃
C) decrease from Y₂ to Y₁
D) decrease from Y₃ to Y₂
E) increase from Y₂ to Y₃

Question

Refer to the following figure to answer the next two questions:
 
-According to the figure,if the economy started at full-employment output,contractionary monetary policy would cause real gross domestic product (GDP) to __________ in the short run.
A) increase from Y1 to Y₂ 
B) increase from Y₁ to Y₃ 
C) decrease from Y₂ to Y₁ 
D) decrease from Y₃ to Y₂ 
E) increase from Y₂ to Y₃

Quizplus · Accepted Answer

Contractionary monetary policy leads to higher interest rates, which leads to a decrease in investment and consumption spending. This decrease in spending causes a decrease in aggregate demand and real GDP. Therefore, real GDP would decrease from Y2 to Y1 in the short run.

Refer to the Following Figure to Answer the Next Two