Homework Answers
Answer : The answer is option C.
Interest rate is a tool of monetary policy. If interest rate increase then people save more and spend less. As a result, the aggregate demand decrease which shift the AD curve to leftward. Here point A is a short run equilibrium point. At point A the actual real GDP is higher than the potential real GDP. Hence to reach at potential real GDP the Federal Reserve will raise interest rate. As a result, the AD curve will shift to leftward and the economy will reach at potential real GDP. Hence except option C other options are not correct. Therefore, option C is the correct answer.
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