Refer to the diagrams. The numbers in parentheses after the AD 1 , AD 2 , and AD 3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should:

A. increase the interest rate from 4 percent to 6 percent.
B. decrease the interest rate from 4 percent to 2 percent.
C. increase investment spending by $20 billion.
D. maintain the interest rate at 4 percent.

ANSWER:

A. increase the interest rate from 4 percent to 6 percent.