Use a graph to show the effects of monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level. Price level LRAS SRAS AD, Real GDP.
Answer: If the economy is experiencing inflation, it is currently at point potential real GDP (n). Monetary policy will shift the aggregate demand curve to the left, reducing real GDP and the price level until it reaches potential real GDP at point.