-Refer to Figure 16-1 $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$

question 21

Multiple Choice

-Refer to Figure 16-1.Suppose a demand shock causes output to rise above full employment and increases money demand from $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$ to $\mathrm { M } _ { 2 } ^ { \mathrm { D } }$ .If the Fed wants to maintain the interest rate at r?,it will

• A) use a constant monetary supply policy
• B) increase the money supply,which will increase aggregate demand and increase output further in the short run
• C) increase the money supply,which will increase the price level,decrease aggregate demand,and lower output back to full employment
• D) decrease money demand,decrease the interest rate,and decrease aggregate demand until output returns to full employment
• E) be unable to meet its interest rate target without causing a recession.

---

Definitions:

Normal Goods

Goods for which demand increases when consumer income increases and vice versa.

Income Effect

The change in an individual's consumption resulting from a change in their real income, affecting their purchasing power.

Normal Good

A type of good for which demand increases as the income of individuals or the economy grows.

Substitution Effect

The substitution effect occurs when consumers replace more expensive items with less costly alternatives.