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.
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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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
"2
"1
MS
MD2
MD₁
1
P₂
P₁
AD
1₂ ₁
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.
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.
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.
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.
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