Suppose that the Federal Reserve (the Fed) conducts countercyclical monetary pol

Question

Suppose that the Federal Reserve (the Fed) conducts countercyclical monetary policy to combat a recession by buying government bonds. Assume that the economy conforms to the Keynesian view of monetary policy. 6. The graph below shows the initial aggregate demand curve (AD1), the aggregate demand curve after the open market operation (AD2), and the aggregate supply curve (AS). Full-employment output is $8 trillion. What effect does the open market operation have on the economy? A. It directs the economy to full employment with a lower price level. B. It directs the economy to a higher price level and lower output. C. It directs the economy to full employment with a higher price level. D. It directs the economy to higher unemployment.

Explanation / Answer

as the FED released more money in to the govt hands.Now the govt can spend more money and can provide more employment to the people.so the full employment will be achieved and as the people are employed now they had enough money to buy things. this increases the demand for the goods so as the price will also increase. hence our answer is C.it directs the economy to full employment with a higher price level cheers :)

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