4. Demand shocks Aa Aa E The following graph shows the economy in long-run equil

Question

4. Demand shocks Aa Aa E The following graph shows the economy in long-run equilibrium at a price level of 120 and potential output of $300 billion. Suppose the Fed decreases the money supply. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the decrease in money supply. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just try again and drag it a little farther. PRICE LEVEL 240 AS 200 160t 120 40 AD2 AD1 100 200 300 400 500 600 REAL GDP (Billions of dollars] Which of the following are true of the transition from the initial equilibrium to the new short-run equilibrium? Check all that apply. The interest rate falls Unit costs of production decrease The demand for money increases. If the price level had remained the same, the change in real GDP would have been than the change

Explanation / Answer

A fall in the money supply in the short run raises the interest rates, which results in a fall in the investment spendings and hence a leftward shift of the aggregate demand curve from AD1 to AD2. The new equilibrium is attained at price level P = 80 and real GDP = 200.

Of the three options, a decrease in unit cost of production is true for transition of initial equilibrium to short run equilibrium.

If the price level had remained the same, the change in real GDP would have been greater than the change depicted in the graph. This is because (d) as money demand falls, the effect of a fall in the money supply on the interest rate is magnified.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.