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

Question

Suppose the economy is initially m long-run equilibrium. The Fed decides to increase the required reserve ratio. In the short-run this contractionary monetary policy will cause: A shift from AD_2 to .AD_1 and a movement to point D; with a lower price level and lower output. A shift from .AD_1 to .AD_2 and a movement to point B; with a higher price level and higher output. A shift from SRAS_2 to SRAS_1 and a movement to point B; with a lower price level and higher output. A shift from SRAS_1 to SRAS_2 and a movement to point .A with a higher price level and the same output.

Explanation / Answer

Option A is correct.

When Fed changes the monetary policy, the AD curve is affected directly and it shifts down from Ad2 to Ad1. This leads to initial movement to point D, with lower price and output.

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