Refer to the graph above. Assume that the economy is initially in equilibrium at the intersection of AD₁ and AS₁. Suppose that there is economic growth which shifts AS₁ to AS₂. Because of the shift from AS₁ to AS₂, a monetarist following a monetary rule would call for an increase in aggregate demand such that the price level and quantity of real domestic output would be: A) P₄ and Q₂ B) P₃ and Q₂ C) P₂ and Q₂ D) P₁ and Q₂

Question

Quizplus · Accepted Answer

When the economy experiences economic growth, the aggregate supply curve shifts to the right from AS₁ to AS₂. A monetarist following a monetary rule would respond to this situation by increasing aggregate demand. In the new equilibrium, the price level increases from P₁ to P₃, while the quantity of real domestic output remains at Q₂. Therefore, the correct answer is choice B.

Refer to the Graph Above