Refer to Figure 14-2. Suppose the money demand increases (for a reason unrelated

Question

Refer to Figure 14-2. Suppose the money demand increases (for a reason unrelated to changes in income or price level) from to and the Fed is using a passive monetary policy. We would expect the money supply to remain at the interest rate to rise from r_1 to r_2 and aggregate demand curve to remain unchanged increase until the interest rate returns to ri, leaving the aggregate demand curve unchanged remain at the interest rate to rise from r_1 to r_2, and aggregate supply curve to shift upward increase, lowering the interest rate and shifting the aggregate demand curve to the right remain at the interest rate to rise from r_1 to r_2, and aggregate demand curve to shift left

Explanation / Answer

Passive monetary policy is a policy of controlling money supply through passive measures like controlling interest rates. If money is demanded more in the market, interest rates would be high to minimize it.

Therefore, the 1st option is correct here. Since money demand increases, money supply would not be affected because interest rate increases from r1 to r2. Increasing interest rate would prevent the excess money demand and keep money supply remain as it is.

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