The economy's real GDP is above long-run equilibrium, and its price level is high. The Fed pursues contractionary monetary policy.
To predict the effect of this change on equilibrium GDP and the price level, complete the steps.
Step 0: Define the market.
Step 1: Draw graph and label equilibrium. (Complete on paper.)
Step 2: Affect aggregate supply or aggregate demand first? The change affects [ Aggregate Supply OR Aggregate Demand ] .
Step 3: Increase or decrease? The change is an [ Increase OR Decrease] .
Step 4: Identify new equilibrium on graph. (Complete on paper.)
Step 5: Compare new to original equilibrium. Because of the change, the price level [ Rises or Falls ] and equilibrium GDP [ Goes Up or Goes Down ] .
