If consumer and business sentiment were to increase dramatically, causing an expansionary gap:
A)monetary policymakers could stabilize the economy by shifting their monetary policy reaction curve to the right.
B)fiscal policymakers could stabilize aggregate demand by cutting income and business taxes.
C)monetary policymakers would likely shift the monetary policy reaction curve to the left to shift the dynamic aggregate demand left.
D)fiscal policymakers could stabilize aggregate demand by increasing government purchases.

Question

Quizplus · Accepted Answer

If consumer and business sentiment were to increase dramatically, causing an expansionary gap, then the economy is likely to experience inflationary pressures. To counteract this, monetary policymakers would want to shift their monetary policy reaction curve to the left to shift the dynamic aggregate demand left. This would reduce aggregate demand and help to reduce inflationary pressures. Cutting taxes or increasing government purchases would only add to aggregate demand and exacerbate the inflationary pressures. Therefore, option C is the best choice.

If Consumer and Business Sentiment Were to Increase Dramatically, Causing