Figure 15-7
-Refer to Figure 15-7.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 15-7 
-Refer to Figure 15-7.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

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 inflation and slow down the economy by increasing interest rates, which is depicted by a leftward shift of the AD curve.

Figure 15-7 -Refer to Figure 15-7.Suppose the Economy Is in Short-Run Equilibrium