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2.6 Macroeconomic objectives and policies

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Question 6

In May 2023, the US Federal Reserve increased its benchmark interest rate from 5.00% to 5.25%.

Draw an aggregate demand and aggregate supply (AD-AS) diagram to illustrate the likely impact of this increase in the US benchmark interest rate on the average price level and real national output.

An AD-AS diagram showing a leftward shift in the Aggregate Demand (AD) curve. The vertical axis is labeled 'Average Price Level (P)' and the horizontal axis is labeled 'Real National Output (Y)'. An upward-sloping short-run aggregate supply curve (SRAS) is intersected by an initial downward-sloping aggregate demand curve (AD1) at equilibrium point E1, with price level P1 and output Y1. A second aggregate demand curve (AD2) is drawn parallel and to the left of AD1. The new equilibrium point E2 is at the intersection of AD2 and SRAS, showing a lower price level P2 and lower real national output Y2. Arrows indicate the downward shift in price level from P1 to P2, and the leftward shift in output from Y1 to Y2.

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2.6 Macroeconomic objectives and policies Questions

  1. A Level
  2. /Economics
  3. /2.6 Macroeconomic objectives and policies