If the Fed pursues contractionary monetary policy

If the Fed pursues contractionary monetary policy -...

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If the Fed pursues contractionary monetary policy, the aggregate demand curve shifts to  the left from aggregate demand curve 1 to aggregate demand curve 2. The intersection  of short-run aggregate supply curve 1 and the aggregate demand curve has now shifted  to the lower left from point A to point B. At point B, both output and the price level have  decreased. This is the new short-run equilibrium.  But, as we move to the long run, the expected price level comes into line with the actual  price level as firms, producers, and workers adjust their expectations. When this occurs,  the short-run aggregate supply curve shifts down along the aggregate demand curve  until the long-run aggregate supply curve, the short-run aggregate supply curve, and the  aggregate demand curve all intersect. This is represented by point C and is the new  equilibrium where short-run aggregate supply curve 2 meets the long-run aggregate 
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If the Fed pursues contractionary monetary policy -...

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