Order Your Paper From the most reliable Essay writing Service. 

.

 



The graphs illustrate the typical effects of an expansionary or
contractionary monetary policy. If an economy is working beyond its
potential GDP level of output and thus experiencing inflationary
pressure on prices, a well-executed contractionary monetary policy
would do which of the following combinations of things?

a)

Lower interest rates — thus encouraging borrowing and
investment — and increase inflation a little while shifting
aggregate demand back to equilibrium.

b)

Raise interest rates — thus encouraging borrowing and
investment — and reduce inflation while pushing aggregate demand
beyond the potential GDP level of output.

c)

None of these

d)

Raise interest rates — thus discouraging borrowing and
investment — reduce price inflation and shift aggregate demand
back to the potential GDP level of output.