Figure 4-10

-In Figure 4-10 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 Figure 4-10 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 will reduce aggregate demand, which will cause a shift from point B to point D (along the AD curve). If the Fed responds by adjusting monetary policy to keep income constant, they will need to decrease the money supply and raise interest rates. This will cause a leftward shift in the MS curve and a new equilibrium at point A. Therefore, the combination of contractionary fiscal policy and the Fed's response will take us from point B to point A, passing through point D.

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