Figure 35-8
Use this graph to answer the questions below.
-Refer to figure 35-8.Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%.Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more contractionary monetary policy?
A)7% unemployment and 1% inflation
B)7% unemployment and 3% inflation
C)3% unemployment and 5% inflation
D)3% unemployment and 7% inflation

Question

Figure 35-8
Use this graph to answer the questions below. 
-Refer to figure 35-8.Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%.Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more contractionary monetary policy?
A)7% unemployment and 1% inflation 
B)7% unemployment and 3% inflation 
C)3% unemployment and 5% inflation 
D)3% unemployment and 7% inflation

Quizplus · Accepted Answer

A more contractionary monetary policy would lead to higher interest rates and reduced aggregate demand, which would increase unemployment and decrease inflation. Moving to point A (7% unemployment and 1% inflation) reflects this outcome.

Figure 35-8 Use This Graph to Answer the Questions Below