Figure 16-4
-Refer to the Figure 16-4.If the economy is at point h and the Bank of Canada pursues a contractionary monetary policy,then the economy will move to which point in the short and long run?
A) point d in the short run and point c in the long run
B) point b in the short run and point c in the long run
C) point c in the long-run and point a in the long run
D) point m in the short run and point c in the long run

Question

Figure 16-4 
-Refer to the Figure 16-4.If the economy is at point h and the Bank of Canada pursues a contractionary monetary policy,then the economy will move to which point in the short and long run?
A) point d in the short run and point c in the long run 
B) point b in the short run and point c in the long run 
C) point c in the long-run and point a in the long run 
D) point m in the short run and point c in the long run

Quizplus · Accepted Answer

A contractionary monetary policy will decrease aggregate demand, shifting the AD curve leftward. In the short run, the economy will move to a point with lower output and higher price level (along the new AD curve). Point m represents this situation. In the long run, the economy will move towards the natural rate of output at potential GDP (Yp) and the new equilibrium will be at point c.

Figure 16-4 -Refer to the Figure 16-4.If the Economy Is at Point