Figure 4-10
-In the figure above, if the Fed's goal is to hold income constant, contractionary fiscal policy combined with the Fed's response takes us from points
A) B to D.
B) D to B.
C) A to C.
D) C to A.

Question

Figure 4-10 
-In the figure above, if the Fed's goal is to hold income constant, contractionary fiscal policy combined with the Fed's response takes us from points
A) B to D. 
B) D to B. 
C) A to C. 
D) C to A.

Quizplus · Accepted Answer

Contractionary fiscal policy would shift the AD curve to the left, from AD1 to AD2, decreasing output and increasing unemployment. If the Fed responds by increasing interest rates, this would shift the LM curve upward from LM1 to LM2. The intersection of the AD2 and LM2 curves would be at point D, where income is lower than it was initially at point B. Therefore, the combination of contractionary fiscal policy and the Fed's response takes us from point B to point D, maintaining a constant level of income.

Figure 4-10 -In the Figure Above, If the Fed's Goal Is to Goal