Figure 11.9 Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.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 static AD-AS model in the figure above, the correct Bank of Canada policy for this situation would be depicted as a movement from
A)A to B.
B)B to C.
C)C to B.
D)A to E.
E)C to D.

Question

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.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 static AD-AS model in the figure above, the correct Bank of Canada policy for this situation would be depicted as a movement from
A)A to B. 
B)B to C. 
C)C to B. 
D)A to E. 
E)C to D.

Quizplus · Accepted Answer

EC) Moving from C to B represents a contractionary monetary policy, which is appropriate when the economy is overheating (above potential GDP with low unemployment and rising wages and prices). This policy aims to reduce inflationary pressures by decreasing aggregate demand.E) Moving from C to D also indicates a contractionary policy, aiming to decrease aggregate demand to tackle inflation, similar to the move from C to B. Both moves are suitable for cooling down an overheated economy.

Figure 119 Alt Text for Figure 11