In the AD-AS model, what happens if the central bank implements a contractionary monetary policy?A.The aggregate demand curve shifts to the right, inflation increases.B.The aggregate demand curve shifts to the left, inflation decreases.C.The aggregate supply curve shifts to the right, inflation decreases.D.The aggregate supply curve shifts to the left, inflation increases.
Question
In the AD-AS model, what happens if the central bank implements a contractionary monetary policy?A.The aggregate demand curve shifts to the right, inflation increases.B.The aggregate demand curve shifts to the left, inflation decreases.C.The aggregate supply curve shifts to the right, inflation decreases.D.The aggregate supply curve shifts to the left, inflation increases.
Solution
In the AD-AS model, if the central bank implements a contractionary monetary policy, the result would be B. The aggregate demand curve shifts to the left, inflation decreases.
Here's why:
-
A contractionary monetary policy means the central bank is trying to reduce the amount of money in the economy. This could be done by increasing interest rates, selling government bonds, or increasing reserve requirements for banks.
-
When interest rates increase, borrowing becomes more expensive. This discourages businesses from taking out loans to invest in their business and consumers from taking out loans for big purchases like houses or cars.
-
As a result, spending in the economy decreases. This is represented by a shift to the left of the aggregate demand curve in the AD-AS model.
-
With less demand for goods and services, there is downward pressure on prices, leading to a decrease in inflation.
Similar Questions
In the AD-AS model(aggregate demand-aggregate supply), what is expected to happen if the government adopts expansionary fiscal policy while the central bank adopts contractionary monetary policy?A.Inflation rises in the short run，output falls in the long runB.Deflation rises in the short run, output rises in the long runC.Inflation rises in the short run, output rises in the long runD.Deflation rises in the short run, output falls in the long run
In the AD-AS (Aggregate Demand-Aggregate Supply) model, what is the likely outcome if the central bank implements an expansionary monetary policy?A.The aggregate demand (AD) curve shifts to the right, leading to increased real GDP and potential inflation.B.The aggregate demand (AD) curve shifts to the right, resulting in increased real GDP, but the impact on inflation depends on the position of the short-run aggregate supply (SRAS) curve.C.The aggregate supply (AS) curve shifts to the right, causing increased real GDP and lower inflation.D.The short-run aggregate supply (SRAS) curve shifts to the right, causing a decrease in real GDP and potential deflation.SUBMIT ANSWER
In the AD-AS Model, if the central bank implements an expansionary monetary policy (such as lowering interest rates), which of the following options most accurately describes the short-term changes in the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SRAS) curve?A.AD shifts to the right; SRAS remains unchanged.B.AD shifts to the left; SRAS shifts to the right.C.AD remains unchanged; SRAS shifts to the left.D.AD shifts to the right; SRAS shifts to the left.
Contractionary monetary policy:Question 33Select one:a.deals with reduced government spending and/or increased taxes.b.results in increased domestic farm prices, export prices, and input prices.c.deals with increasing government spending and/or decreasing tax rates.d.deals with increasing money supply in the economy and/or decreasing interest rates.e.deals with decreasing money supply in the economy and/or increasing interest rates.
The Federal Reserve would most likely adopt a contractionary monetary policy in which economic situation?A.The country has a high unemployment rate and slow economic growth.B.The country has a low inflation rate and weak economic growth.C.The country has a high inflation rate and rapid economic growth.D.The country has a low unemployment rate and steady economic growth.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.