The Fed can close a recessionary gap by _____
A) increasing fiscal expenditure.
B) increasing taxes.
C) decreasing taxes.
D) selling U.S. government bonds.
E) lowering the interest rate.

Question

Quizplus · Accepted Answer

The Fed can close a recessionary gap by lowering the interest rate. By reducing the interest rate, borrowing becomes cheaper, and people and businesses are encouraged to take out loans to spend and invest, boosting aggregate demand and closing the recessionary gap.  Increasing fiscal expenditure and decreasing taxes could also stimulate the economy, but those actions are typically the responsibility of the government, not the central bank. Increasing taxes or selling U.S. government bonds would have the opposite effect, reducing aggregate demand and potentially worsening the recessionary gap.

The Fed Can Close a Recessionary Gap by _____