Figure 11.12 Alt text for Figure 11.12: In figure 11.12, a graph comparing real GDP and price level.
Long description for Figure 11.12: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI, 2002 = 100).4 lines are shown; AD1, AD2, 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 right.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 lines AD1 and SRAS at point A.Lines AD2 and SRAS intersect at point B.
-Refer to Figure 11.12.In the figure above, suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada?
A)an increase in income taxes
B)a decrease in the desired reserve ratio
C)an open market purchase of Canada bonds
D)an open market sale of Canada bonds
E)a decrease in lending to commercial banks

Question

Figure 11.12  Alt text for Figure 11.12: In figure 11.12, a graph comparing real GDP and price level.
Long description for Figure 11.12: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI, 2002 = 100).4 lines are shown; AD1, AD2, 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 right.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 lines AD1 and SRAS at point A.Lines AD2 and SRAS intersect at point B.
-Refer to Figure 11.12.In the figure above, suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada?
A)an increase in income taxes 
B)a decrease in the desired reserve ratio 
C)an open market purchase of Canada bonds 
D)an open market sale of Canada bonds 
E)a decrease in lending to commercial banks

Quizplus · Accepted Answer

The movement of the economy from point A to point B in the graph indicates an increase in real GDP and an increase in the price level. This could be caused by an increase in aggregate demand, which could be achieved by an open market purchase of Canadian bonds by the Bank of Canada. This would lead to an increase in the money supply, lower interest rates, and higher investment and consumption spending, driving up aggregate demand and hence real GDP and the price level. Therefore, the correct choice is C, an open market purchase of Canadian bonds.

Figure 1112 Alt Text for Figure 11