Loot at the figure monetary policy II If the short run equil

Loot at the figure monetary policy II. If the short- run equilibrium is a Y_2 appropriate central bank policy is All of the following factors will shift the money demand curve EXCEPT: Look at the figure inflationary and Recessionary Gaps A movement from AD_1 to AD_3 could be caused by Implicit liabilities of a government are:

Solution

19.) Short run equilibrium is at Y2 at price P2.The appropriate central bank policy is contractionary. Bank should decrease moey supply in the economy. If money supply in the economy decreases, interest rate increases due to greater money demand.Due to increase in interest rate, investment falls.Since investment is a positive component of aggregate demand,so AD falls from fall in investment.so AD shifts to left so that it intersects SRAS at P1 and real gdp will be at full employment that is Y1.

21.)Since government purchase is a positive component of Aggregate demand so increase in government spending lead to shift of AD1 to AD3. that is from recessionary gap to inflationary gap leading to rise in price level.