Figure 15-12
-Refer to Figure 15-12.In the dynamic AD-AS model,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely
A)increase interest rates.
B)decrease interest rates.
C)not change interest rates.
D)increase the inflation rate.

Question

Figure 15-12 
-Refer to Figure 15-12.In the dynamic AD-AS model,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely
A)increase interest rates. 
B)decrease interest rates. 
C)not change interest rates. 
D)increase the inflation rate.

Quizplus · Accepted Answer

If the economy is expected to go from point A to point B in year 2, it means that there will be an increase in aggregate demand (AD) that may push the economy beyond the full-employment output level, causing inflationary pressures. To counteract this, the Federal Reserve can increase interest rates to decrease investment spending and consumption spending, reducing aggregate demand and shifting the economy back towards the full-employment output level at point A. Therefore, the best choice is A.

Figure 15-12 -Refer to Figure 15-12.In the Dynamic AD-AS Model,if the Economy