According to the graph, contractionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium _______ to equilibrium ________ in the short run.

Question

BlackTom AI · Accepted Answer

To tackle the question, I’ll lay out what contractionary monetary policy does in the short run and then apply it to the labeled points on the graph.

First, recall the core effect: contractionary monetary policy reduces overall demand in the economy by raising interest rates and decreasing investment and consumption. This shifts the aggregate demand, typically to the left. In the short run, a leftward shift in AD tends to lower the equilibrium price level and also reduce real GDP from its full-employment level.

Option by option analysis:

Option A: "A; B" — This would imply the economy moves from equilibrium at point A to equilibrium at point B. If A represents the initial full-employment equilibrium and B represents a higher output or a higher price level than A, this would suggest an expansionary or at least non-contracting outcome. Since contractionary policy should not increase output, this path is inconsistent with the expected direction of movement under a contractionary policy.

Option B: "B; C" — This option indicates the economy moves from equilibrium at point B to equilibrium at point C. If you examine the graph, leftward AD shifts (contraction) typically push the economy toward a lower output and usually a lower price level in the short run. If B corresponds to a higher output level (and/or higher price) than C, then moving from B to C aligns with contractionary effects: output falls and the new short-run equilibrium is at a lower GDP and lower price level relative to the initial full-employment point.

Option C: "C; D" — This would describe a move from equilibrium at point C to equilibrium at point D. Depending on the labeling, this could imply a further change in price level or output in a direction that may not match the contractionary shift shown on the graph. If C already represents a relatively lower output than the full-employment level, moving to D could imply either a further price drop with little change in output or an inconsistent path, which cannot be confidently tied to the standard contractionary effect without more specifics.

Option D: "A; B" — This path would mean moving from A to B. If A is the full-employment equilibrium and B is a higher-output (or higher-price) point, this would indicate an expansionary movement, which contradicts the defined impact of contractionary monetary policy.

Putting it together, the combination that best matches the standard short-run impact of contractionary policy (a shift to lower output and typically a lower price level than the initial full-employment equilibrium) is the journey from B to C on the graph. This corresponds to a reduction in real GDP and a change in the price level consistent with a tightening of monetary conditions.

Therefore, the selection that matches contractionary policy’s short-run trajectory is option B: "B; C". The other options describe movements that imply expansionary or otherwise inconsistent changes in output and prices with contractionary policy.

According to the graph, contractionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium _ to equilibrium __ in the short run.单项选择题

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According to the graph, contractionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium _______ to equilibrium ________ in the short run.单项选择题