Figure 26-7
-Refer to Figure 26-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the static AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Question

Figure 26-7 
-Refer to Figure 26-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the static AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Quizplus · Accepted Answer

In this scenario, the economy is overheating with low unemployment and rising wages and prices. The Fed should implement contractionary monetary policy to reduce aggregate demand, moving the economy from point C to point B, closer to potential GDP.

Figure 26-7 -Refer to Figure 26-7.Suppose the Economy Is in Short-Run Equilibrium