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Figure: Monetary Policy II
-(Figure: Monetary Policy II) Look at the figure Monetary Policy II. If the short-run equilibrium is at Y₂, appropriate central bank policy is:

Question

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

-(Figure: Monetary Policy II) Look at the figure Monetary Policy II. If the short-run equilibrium is at Y₂, appropriate central bank policy is:

Quizplus · Accepted Answer

The short-run equilibrium is above the long-run equilibrium, indicating that there is inflationary pressure in the economy. To tackle this, appropriate central bank policy would be to adopt a contractionary monetary policy, which will reduce aggregate demand and shift it leftward, leading to a decrease in inflationary pressures and an eventual movement towards the long-run equilibrium.

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