May/June 2026 Paper 13

2026 · 30 questions · 30 parts · 30 marks

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25Monetary PolicyHard1 mark
The diagram shows the aggregate demand (AD) and aggregate supply (AS) curves for an economy. The AD curve is initially at .
The economy is experiencing a growth in exports which is expected to lead to an increase in the price level to .
In consequence, the government adopts a contractionary monetary policy to reduce the price level to the lowest possible value without changing national income.
Diagram, aggregate demand (AD) and aggregate supply (AS) curves on axes of price level (vertical) and national income (horizontal). The AS curve is flat at low output and curves sharply upward, becoming near-vertical from national income Y1 onward. Four downward-sloping AD lines are drawn, from lowest to highest: AD4, AD1, AD2, AD3; each crosses the near-vertical part of AS at approximately the same national income Y1, at price levels P4, P1, P2 and P3 respectively (lowest to highest, matching the AD curve's position).
Which statement is correct?