Figure 17-7

-Refer to Figure 17-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the basic AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Question

Figure 17-7
 
-Refer to Figure 17-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the basic AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Quizplus · Accepted Answer

In this situation, the economy is experiencing inflationary pressures due to the low unemployment rate and rising wages and prices. According to the AD-AS model, this would cause the aggregate supply curve to shift leftward, leading to a higher price level and lower real GDP. To combat this inflationary pressure and bring the economy back to its potential GDP, the Fed should pursue contractionary monetary policy, which would shift the aggregate demand curve leftward. This could be depicted as a movement from point C to point B in the figure above. Therefore, C is the correct choice.

Figure 17-7 -Refer to Figure 17-7.Suppose the Economy Is in Short-Run Equilibrium