Figure 14-3 -Suppose the Economy Was Currently Operating at SRAS and AD₂

question 102

Multiple Choice

Figure 14-3
-Suppose the economy was currently operating at SRAS and AD₂ in Figure 14-3. To combat inflation, the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the economy, AD has already moved to AD₁. Which of the following would be true?

• A)The policy would cause the economy to fall further into a recession than it would have if the Fed had not undertaken the policy.
• B)The policy will help by preventing the recession from becoming worse.
• C)The policy would cause the economy to go into an economic boom.
• D)This is a trick question; the impact of monetary policy is felt immediately by the economy.

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Definitions:

Introductory Stage

The first phase of the product life cycle, when a new product is launched to the market.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in its price, indicating its sensitivity to price changes.

Break-even Point

The point at which total costs and total revenues are equal, meaning no net loss or gain has been made.

Fixed Cost

Expenses that do not change with the level of goods or services produced by a business, such as rent or salaries.