Using Figure 1 above, if the aggregate demand curve shifts from AD2 to AD3 the result in the short run would be:

What condition is necessary for a fiat money system to work?

What will be an ideal response?

Under a fixed exchange rate regime, an expansionary fiscal policy would ____ interest rates and GDP, which would cause ____ pressure on the exchange rate, forcing the monetary authority to undertake a(n) ______ monetary policy.

A) raise; downward (appreciation); expansionary B) lower; upward (depreciation); contractionary C) raise; upward (depreciation); contractionary D) lower; downward (appreciation); expansionary