-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run
A) the unemployment rate will be the same rate as before the contractionary monetary policy.
B) the unemployment rate will be larger than the rate before the expansionary monetary policy.
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy.
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run
A) the unemployment rate will be the same rate as before the contractionary monetary policy. 
B) the unemployment rate will be larger than the rate before the expansionary monetary policy. 
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. 
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Quizplus · Accepted Answer

In the long run, the economy tends to return to its natural rate of unemployment, regardless of the shifts in aggregate demand. This means that after the effects of unexpected contractionary monetary policy have been absorbed, the unemployment rate will stabilize at its original level, assuming no other changes in the economy.

-Refer to the Above Figure