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 changes in the money supply have a direct effect on aggregate demand. By decreasing interest rates, they believe they can stimulate borrowing and investment, leading to increased AD and closer to full-employment output. Therefore, the appropriate policy lever would be to increase AD by reducing interest rates. None of the other options are specific to monetarist theory or provide a direct mechanism for increasing AD.