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Figure: Shifts in SRAS and AD
-(Figure: Shifts in SRAS and AD)If the economy is at short-run equilibrium point b because of a negative supply shock,the Fed could enact an expansionary monetary policy,thus shifting the new equilibrium to point _____.As a result of this,the price level would _____ and real output would _____.
A) a;decrease;further decrease
B) c;further increase;increase
C) d;decrease;increase
D) No monetary policy would have any effect;the equilibrium will remain at point b.

Question

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Figure: Shifts in SRAS and AD 
-(Figure: Shifts in SRAS and AD)If the economy is at short-run equilibrium point b because of a negative supply shock,the Fed could enact an expansionary monetary policy,thus shifting the new equilibrium to point _____.As a result of this,the price level would _____ and real output would _____.
A) a;decrease;further decrease 
B) c;further increase;increase 
C) d;decrease;increase 
D) No monetary policy would have any effect;the equilibrium will remain at point b.

Quizplus · Accepted Answer

If the economy is at point b due to a negative supply shock, the Fed can enact an expansionary monetary policy, which would shift the AD curve to the right (from AD1 to AD2). This would result in a new equilibrium point at c, where both price level and real output increase. Therefore, choice B is the correct answer. None of the other options are correct.

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