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Assume that an economy is initially in​ long-run equilibrium. Explain the ​short-run effect of monetary policy that causes an increase in interest rates. As a result of higher interest​ rates, the A. ​long-run aggregate supply curve will shift left. B. aggregate demand curve will shift left. C. ​short-run aggregate supply curve will shift left. D. aggregate demand curve will shift right. The new equilibrium will be A. where the original aggregate demand curve intersects the original​ short-run aggregate supply curve. B. where the new aggregate demand curve intersects the original​ short-run aggregate supply curve. C. where the new aggregate demand curve intersects the original aggregate demand curve.

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Answer:

As a result of higher interest​ rates, the

  • B. aggregate demand curve will shift left.

The new equilibrium will be

  • B. where the new aggregate demand curve intersects the original​ short-run aggregate supply curve.

Explanation:

A contractionary monetary policy will increase the interest rates, lowering investment and consumption. This will result in a leftward shift of the aggregate demand curve.

The new equilibrium (E1) will be at the point where the new aggregate demand curve (AD1) intersects the original short run aggregate supply curve (SRAS) and the long run aggregate supply curve (LRAS).

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