AP Macroeconomics Question 225: Answer and Explanation

Test Information

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Question: 225

4. In the short run, contractionary monetary policy causes aggregate demand to output to , and the price level to

Aggregate demand      Output      Price Level

  • A. Increases           Increases      Increases
  • B. Increases           Increases      Decreases
  • C. Decreases           Decreases      Increases
  • D. Decreases           Decreases      Decreases
  • E. Decreases           Increases      Increases

Correct Answer: D

Explanation:

(D) Contractionary monetary policy is a decrease in the money supply. This shifts aggregate demand to the left. A leftward shift in aggregate demand results in a higher level of output and a higher price level. This is seen in the aggregate demand-aggregate supply model: