Suppose the economy is initially in longrun equilibrium The

Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the discount rate. In the short-run, this expansionary monetary policy will cause: Price Leve 122 SRAS2 LRAS 118 116 114 112 110 O A. A shift from AD2 to AD, and a movement to point C, with a lower price O B. A shift from AD1 to AD2 and a movement to point B, with a higher price ° C. A shift from SRAS 1 to SRAS2 and a movement topon:B, with a lower 0 D. A shift from SRAS2 to SRAS1 and a movement to point D, with a higher level and the same output level and higher output. price level and higher output. price level and lower output. SRAS1 104 102 AD 96 92 AD1 0 24 6 8 10 12 14 16 Real GDP (trillions of 2000 dollars) Click to select your answer

Solution

1. D) A shift from SRAS2 to SRAS1 and a movement to point D, with a higher price level and lower output.

Expansionary monetary policy shifts AS curve rightwards causing decrease in price level and increase in output.

2. D) an increase in taxes

Increase in tax rates decreases the disposable income of consumer and as a result, consumption decreases which decreases AD.

3. A) The actions the Federal Reserve takes to manage the money supply and interest rates.

Monetary policy is the policy of Federal Reserve to control the supply of money.