Economics (AS & A Level) · May / June 2026 · Paper 13 · Question 25

The diagram shows the aggregate demand (AD) and aggregate supply (AS) curves for an economy. The AD curve is initially at AD₁. The economy is experiencing a growth in exports which is expected to lead to an increase in the price level to P₃. In consequence, the government adopts a contractionary monetary policy to reduce the price level to the lowest possible value without changing national income. Which statement is correct?

1. AIf there is no monetary policy the AD curve will move to AD₂, but following the contractionary monetary policy the AD curve moves to AD₁.
2. BIf there is no monetary policy the AD curve will move to AD₂, but following the contractionary monetary policy the AD curve moves to AD₃.
3. CIf there is no monetary policy the AD curve will move to AD₃, but following the contractionary monetary policy the AD curve moves to AD₂.
4. DIf there is no monetary policy the AD curve will move to AD₃, but following the contractionary monetary policy the AD curve moves to AD₄.

As printed in the paper