Refer to the graphs above, in which the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Q_f in the economy, the Fed should: A) Decrease the interest rate from 10 to 8 percent B) Decrease the interest rate from 8 to 6 percent C) Decrease the interest rate from 6 to 4 percent D) Increase investment spending from $30 to $60 billion

Question

Quizplus · Accepted Answer

Point B is below the level of investment necessary to achieve the long-run goal of full-employment output at Q_f. To reach this goal, the Fed needs to increase investment spending which is not one of the given options. Therefore, the only feasible option is to decrease the interest rate to stimulate investment spending. To achieve full-employment output, the interest rate needs to be decreased from 8 to 6 percent, which will increase investment spending and shift the investment demand curve to the right, enabling the economy to reach the desired output level at point Q.

Refer to the Graphs Above, in Which the Numbers in Parentheses