Use the figure below to answer the following question(s).
Figure 14-5

-In Figure 14-5,AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level,Y₁.The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be
A)a decrease in aggregate demand to AD₂ and a decrease in real output to Y₂.
B)a decrease in aggregate demand to AD₂ but real output would remain at Y₁.
C)a decrease in aggregate demand to AD₂ and an increase in short-run aggregate supply to SRAS₂,causing the price level to fall to P₃ and real output to remain unchanged at Y₁.
D)no change;AD and SRAS will stay at AD₁ and SRAS₁.

Question

Use the figure below to answer the following question(s).
Figure 14-5
 
-In Figure 14-5,AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level,Y₁.The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be
A)a decrease in aggregate demand to AD₂ and a decrease in real output to Y₂. 
B)a decrease in aggregate demand to AD₂ but real output would remain at Y₁. 
C)a decrease in aggregate demand to AD₂ and an increase in short-run aggregate supply to SRAS₂,causing the price level to fall to P₃ and real output to remain unchanged at Y₁. 
D)no change;AD and SRAS will stay at AD₁ and SRAS₁.

Quizplus · Accepted Answer

A more restrictive monetary policy by the Fed typically leads to higher interest rates, which decreases investment and consumer spending, thus reducing aggregate demand from AD₁ to AD₂ and causing a decrease in real output from Y₁ to Y₂ in the short run.

Use the Figure Below to Answer the Following Question(s)