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 long-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 the full-employment level of output to Y₂.
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 long-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 the full-employment level of output to Y₂. 
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 restrictive monetary policy reduces aggregate demand, shifting AD to AD₂. In the long run, prices and wages adjust, increasing SRAS to SRAS₂, leading to a lower price level P₃ while output returns to the full-employment level Y₁.

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