Figure 24-2

Multiple Choice

Figure 24-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money; on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.

-Refer to Figure 24-2.A decrease in Y from Y₁ to Y₂ is explained as follows:

A) The Federal Reserve increases the money supply,causing the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂.
B) An increase in P from P₁ to P₂ causes the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂.
C) A decrease in P from P₂ to P₁ causes the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂.
D) An increase in the price level causes the money-demand curve to shift from MD₂ to MD₁; this shift of MD causes r to decrease from r₂ to r₁; and this decrease in r causes Y to decrease from Y₁ to Y₂.