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Continue to assume investment spending falls. The Aggregate Demand/Aggregate Supply model suggests that if the Federal...

Continue to assume investment spending falls. The Aggregate Demand/Aggregate Supply model suggests that if the Federal Reserve acts to offset the short run consequences of the decrease in investment then the price level will ________ and real GDP will ________.

Group of answer choices

continue to fall; fall even further.

rise; increase back to the natural level of output.

rise; decrease further.

continue to fall; increase back to the natural level of output.

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Answer #1

Answer) The Aggregate Demand/Aggregate Supply model suggests that if the Federal Reserve acts to offset the short run consequences of the decrease in investment then the price level will increase and real GDP will increase back to the natural level of output.

As shown in the diagram decrease in investment shift AD to leftward i.e to AD1 to offset the effect expansionary monetary policy is introduced which leads to rightward shift in AD to AD1 and output will be back to full employment and price rises.

Hence option B is the correct answer.

Note : Please like my answer and comment for further clarification, it's urgent.

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