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. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP? A) Increase the money supply from $75 to $150 billion B) Increase the money supply from $150 to $225 billion C) Decrease the money supply from $225 to $150 billion D) Make no change in the money supply

Question

Quizplus · Accepted Answer

Looking at the graphs, we can see that the economy is currently producing at a level of real GDP that is above the noninflationary full-employment level. Therefore, there is upward pressure on prices in the economy, and the Fed needs to take action to decrease AD and shift it leftward. The only option that achieves this is decreasing the money supply from $225 to $150 billion, which will increase interest rates and decrease investment spending, ultimately leading to a decrease in aggregate demand.

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