In Figure 8.5,if equilibrium real output is Q₁ and full-employment real output is Q₂,an appropriate monetarist policy lever would be to increase A)AD by decreasing income taxes. B)AS by increasing the money supply. C)AD by reducing interest rates. D)AD by reducing government regulations.

Question

Quizplus · Accepted Answer

Monetarists believe that the money supply is the key determinant of the level of economic activity in the short run. Thus, increasing the money supply would effectively shift the AD curve to the right, increasing real output from Q₁ to Q₃ and potentially closing the output gap between equilibrium and full employment. Reducing interest rates would encourage borrowing and spending, further stimulating aggregate demand. Decreasing income taxes or reducing government regulations would have more indirect effects on AD and would not be as effective in addressing the output gap directly.