Question

Score: 0 of 4 pts 4 of 10 (6 complete) | HWS Concept: Contractionary Policy 1 Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bonds. In the short-run, this contractionary monetary policy will cause: LRAS O A. A shift from SRAS, to SRAS, and a movement to point A, with a higher price level and the same output. OB. A shift from SRAS, to SRAS, and a movement to point B, with a lower price level and higher output. OC. A shift from AD, to AD, and a movement to point B, with a higher price level and higher output. OD. A shift from AD, to AD, and a movement to point D, with a lower price level and lower output. Price Level 122 120- 118- 116- 114- 112 1104 108- 106- 104- 102 100- 96- 94- 92- 90 2 4 6 8 10 12 14 Real GDP (trillions of 2000 dollars) 16

Answer 1

The correct option is D.

This is because as Fed sell bond in the market through Open Market Operation then it will withdrawl the money from the economy as a result Money Supply will decrease as a result Aggregate Demand Curve will shift to the left from AD₂ to AD₁ and a movement to point D with lower price level and lower output. AD curve shift because it is derived from IS-LM Curve and LM curve shufts due to shift in money supply. Hence AD curve will shift if there is change in money supply.