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Figure: Monetary Policy I
-(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills:

Question

Use the following to answer questions :
Figure: Monetary Policy I

-(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills:

Quizplus · Accepted Answer

Selling Treasury bills will lead to a decrease in the money supply and an increase in the interest rate. This will make borrowing more expensive and reduce aggregate demand, shifting the AD curve to the left. Depending on the initial position of the economy on the SRAS curve, this could lead to a recessionary gap (shown by the possible shift to AD₁).

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