In Figure 8.5,if this economy's inflation goal is a price level of P₂ but the equilibrium price level is P₃,an appropriate monetary policy lever would be to A)Decrease AS by increasing the money supply. B)Decrease AD by increasing interest rates. C)Decrease AD by increasing income taxes. D)Increase AS by increasing the money supply.

Question

Quizplus · Accepted Answer

The appropriate monetary policy lever would be to decrease AD by increasing interest rates. By increasing interest rates, the cost of borrowing increases, leading to a decrease in spending by firms and consumers. This decrease in spending reduces demand and puts downward pressure on prices, helping to decrease the equilibrium price level in the economy.