The Short Run Sequence of Events Following an Unanticipated Shift

question 121

Multiple Choice

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

• A) lower interest rates, decrease in aggregate demand, and a reduction in output.
• B) lower interest rates, increase in aggregate demand, and an expansion in output.
• C) higher interest rates, decrease in aggregate demand, and a reduction in output.
• D) higher interest rates, increase in aggregate demand, and an expansion in output.

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Definitions:

Output Effect

The output effect is the change in total revenue resulting from selling additional units of a product, considering the impact on price due to supply and demand.

Elastic Demand

A condition where the quantity demanded of a good or service is highly responsive to changes in its price.

Output Effect

The impact on total revenue when a firm changes its output level, considering demand elasticity.

Substitution Effect

The change in consumption patterns due to a relative change in prices leading consumers to substitute one product for another.