Refer to the information provided in Figure 13.2 below to answer the questions that follow. Figure 13.2
-Refer to Figure 13.2.In response to an increase in government spending,the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from
A)AD1 to AD2.
B)AD3 to AD4.
C)AD5 to AD6.
D)AD6 to AD1.

Question

Refer to the information provided in Figure 13.2 below to answer the questions that follow.  Figure 13.2
-Refer to Figure 13.2.In response to an increase in government spending,the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from
A)AD1 to AD2. 
B)AD3 to AD4. 
C)AD5 to AD6. 
D)AD6 to AD1.

Quizplus · Accepted Answer

According to the information provided in Figure 13.2, an increase in government spending would shift the aggregate demand (AD) curve to the right. However, the impact on the interest rate would depend on the position of the money market equilibrium (MME) curve. If the MME curve intersects the LM curve at a point where the interest rate is relatively low, the Fed would increase the interest rate by a greater amount to restore equilibrium. This is the case for the shift from AD5 to AD6, as shown by the larger vertical distance between the original and new MME curves compared to the other shifts. Therefore, choice C is the best answer.

Refer to the Information Provided in Figure 13