Figure 11.10 Alt text for Figure 11.10: In figure 11.10, a graph comparing real GDP and price level.
Long description for Figure 11.10: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI, 2002 = 100).3 lines are shown; AD, LRAS, SRAS.Line AD begins in the top left corner and slopes down to the end of the x-axis.Line SRAS begins in the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects the lines AD and SRAS.The point of intersection of lines AD and SRAS is marked as A.
-Refer to Figure 11.10.In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to
A)lower the target for the overnight interest rate.
B)raise the target for the overnight interest rate.
C)lower income taxes.
D)raise income taxes.
E)lower the desired reserve ratio.

Question

Figure 11.10  Alt text for Figure 11.10: In figure 11.10, a graph comparing real GDP and price level.
Long description for Figure 11.10: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI, 2002 = 100).3 lines are shown; AD, LRAS, SRAS.Line AD begins in the top left corner and slopes down to the end of the x-axis.Line SRAS begins in the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects the lines AD and SRAS.The point of intersection of lines AD and SRAS is marked as A.
-Refer to Figure 11.10.In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to
A)lower the target for the overnight interest rate. 
B)raise the target for the overnight interest rate. 
C)lower income taxes. 
D)raise income taxes. 
E)lower the desired reserve ratio.

Quizplus · Accepted Answer

Point A is the point where AD (Aggregate Demand) intersects SRAS (Short Run Aggregate Supply). This indicates an equilibrium point where the level of output (real GDP) and the price level have already been determined. However, the price level is higher than the long-run equilibrium price level (determined by LRAS). To reduce inflationary pressures, the Bank of Canada would need to implement contractionary monetary policy, such as raising the target for the overnight interest rate. This would reduce spending and shift AD leftwards, leading to a decrease in the price level and a movement towards the long-run equilibrium. None of the other options listed would be appropriate for this particular situation.

Figure 1110 Alt Text for Figure 11