The figure given below depicts short-run equilibrium in an aggregate demand-aggregate supply model.The Fed can return the economy to potential output in the long run by:
Figure 15.3

A)purchasing U.S.government securities.
B)decreasing taxes.
C)selling U.S.government securities.
D)lowering the discount rate.
E)lowering the required reserve ratio.

Question

​The figure given below depicts short-run equilibrium in an aggregate demand-aggregate supply model.The Fed can return the economy to potential output in the long run by: ​
Figure 15.3
​
 ​
A)purchasing U.S.government securities. 
B)decreasing taxes. 
C)selling U.S.government securities. 
D)lowering the discount rate. 
E)lowering the required reserve ratio.

Quizplus · Accepted Answer

Since the economy is currently in a short-run equilibrium above potential output and experiencing inflationary pressure, the Fed can reduce aggregate demand and return the economy to potential output by engaging in contractionary monetary policy. The most effective way to achieve this is by selling U.S. government securities, which will increase interest rates and reduce investment and consumption spending, thereby reducing aggregate demand.

​The Figure Given Below Depicts Short-Run Equilibrium in an Aggregate

The Figure Given Below Depicts Short-Run Equilibrium in an Aggregate