23. assume the economy is operating at full - employment when the fed announces an increase in the supply of…

23. assume the economy is operating at full - employment when the fed announces an increase in the supply of money. which of the graphs below correctly depicts this occurrence? a. graph a b. graph b c. graph c

23. assume the economy is operating at full - employment when the fed announces an increase in the supply of money. which of the graphs below correctly depicts this occurrence? a. graph a b. graph b c. graph c

Answer

Brief Explanations:

When the Fed increases the money - supply in an economy operating at full - employment, in the short - run, the increase in money supply leads to an increase in aggregate demand (AD). This is because with more money in the economy, consumers and firms have more purchasing power. In the AD - AS model, the AD curve shifts to the right. In the long - run, since the economy was initially at full - employment (LRAS is vertical at the full - employment output level), the increase in AD will only cause an increase in the price level (PL) and no long - run change in real output (Y). Graph A shows an increase in AD (shift of AD curve to the right) which is consistent with the short - run effect of an increase in money supply in a full - employment economy.

Answer:

a. Graph A