Question 27 1 pts Figure 20. AS LRAS Price Level AD1 AD2 Quantity of Output Refe

Question

Question 27 1 pts Figure 20. AS LRAS Price Level AD1 AD2 Quantity of Output Refer to Figure 20. Which of the following statements is/are correct? A movement from point a to point b is accompanied by a rise in unemployment An expansionary monetary policy or the government's use of fiscal policy could move the economy from point b to point a. If no action is taken by policymakers, the price level will fall even lower as the economy moves from point b to a new long-run equilibrium All of the above statements are correct

Explanation / Answer

(27) Option (4)

Real GDP being lower at point b, unemployment is higher. The economy can move back to point a if aggregate demand rises, by use of expansionary monetary or fiscal policy. In long run, lower price level at point b will lower the cost of input, so firms will rise output, increasing aggregate supply. Short run AS will shift right, intersecting AD2 at a further lower price level.

(28) Option (2)

As price level rises from P1 to P2, money loses purchasing power, so people demand more money shifting money demand curve rightward which raises interest rate. As interest rate rises, output falls.

(29) Option (3)

In recent years Fed is targeting federal funds rate.

(30) Option (4)

Higher aggregate demand raises price level and output in short run. In the long run, higher price level raises cost of inputs, so firms lower supply, shifting short run AS curve leftward until the new SRAS intersects the higher AD at a further higher price level, but restoring output to original, potential output level.

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