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 static 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 static AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Quizplus · Accepted Answer

The economy is in short-run equilibrium above potential GDP, with high employment and inflationary pressures (rising wages and prices). To address this situation, the Fed needs to constrain aggregate demand and slow down economic growth. This can be achieved by increasing interest rates, which would reduce investment and consumption spending, leading to a leftward shift of the AD curve. The correct Fed policy in this situation would be depicted as a movement from point C to point B, where output and prices are lower, but closer to the long-run equilibrium. Therefore, the correct answer is C.

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