Figure 21. The graph on the left shows a money market with the interest rate on the vertical axis and the quantity ofmoney on the horizontal axis. The graph on the right is related to the money market graph and shows an aggregatedemand (AD) with the price level on the vertical axis and quantity of output on the horizontal axis"2"1MSMD2MD₁1P₂P₁AD1₂ ₁Refer to Figure 21. The changes on the two graphs are related. Which of the following is a correct explanation ofthe movement of the economy from point Y1 to point Y2.The Federal Reserve's expansionary monetary policy shifts the demand for money from MD1 to MD2. The resulting increase inthe interest rate causes Y to decrease from Y1 to Y2.The rise of the price level from P1 to P2 leads to an increase in the demand for money represented by the rightward shift of themoney demand curve from MD1 to MD2. The resulting rise of the interest rate causes Y to decrease from Y1 to Y2.A fall in the price level from P2 to P1 causes an increase in the demand for money represented by a rightward shift of the moneydemand curve from MD1 to MD2. The resulting increase in the interest rate causes Y to decrease from Y1 to Y2.A rise in the price level from P1 to P2 causes a fall in the demand for money represented by a leftward shift of the moneydemand from MD2 to MD1. The resulting decrease in the interest rate causes Y to decrease from Y1 to Y2.

The money demand curve shows the relationship between the interest rate and the quantity of money…

Figure 21. The graph on the left shows a money market with the interest rate on the vertical axis and the quantity of money on the horizontal axis. The graph on the right is related to the money market graph and shows an aggregate demand (AD) with the price level on the vertical axis and quantity of output on the horizontal axis MS # r1 2² MD2 MD1 O NO P₂ P₁ AD 12 1₁ Refer to Figure 21. The changes on the two graphs are related. Which of the following is a correct explanation of the movement of the economy from point Y1 to point Y2. The Federal Reserve's expansionary monetary policy shifts the demand for money from MD1 to MD2. The resulting increase in the interest rate causes Y to decrease from Y1 to Y2. O The rise of the price level from P1 to P2 leads to an increase in the demand for money represented by the rightward shift of the money demand curve from MD1 to MD2. The resulting rise of the interest rate causes Y to decrease from Y1 to Y2. O A fall in the price level from P2 to P1 causes an increase in the demand for money represented by a rightward shift of the money demand curve from MD1 to MD2. The resulting increase in the interest rate causes Y to decrease from Y1 to Y2. O A rise in the price level from P1 to P2 causes a fall in the demand for money represented by a leftward shift of the money demand from MD2 to MD1. The resulting decrease in the interest rate causes Y to decrease from Y1 to Y2.

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 12P