Suppose the economy is initially in long-run equilibrium The Fed decides to incr

Question

Suppose the economy is initially in long-run equilibrium The Fed decides to increase the required reserve ratio In the short-run, this contractionary monetary policy will cause: Price Level 122 12 118 SRAS2 LRAS 0 A, A shift from SRAS2 to SRAS! and a movement 114 112 to point B, with a lower price level and higher SRAS1 output. point D, with a lower price level and lower output. point B, with a higher price level and higher 108 106 104 102 10 O B. A shift from AD2 to AD1 and a movement to AD 2 O c. A shift from AD1 to AD2 and a movement to 98 output. 0 D. A shift from SRAS! to SRAS, and a movement 94 92 90 AD to point A, with a higher price level and the same output. 0 4 6 10 12 14 16 Real GDP (trillions of 2000 dollars)

Explanation / Answer

"B"

A shift from AD2 to AD1, an increase in the reserve requirement will decrease the money supply in the market. With lower money in hand, people will demand less and it will decrease the demand and price in the market reducing the output. The answer is "B". The movement will happen from point A to D.

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