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 sentiments increase, it would likely result in an expansionary gap, which would increase inflationary pressures. To stabilize the economy, monetary policymakers would shift the monetary policy reaction curve to the left, causing interest rates to increase and reducing aggregate demand. This would help bring the economy back to its potential output and reduce inflationary pressures. Fiscal policymakers could also use tools like increasing taxes or reducing government purchases, but these policies may not be as effective or quick as monetary policy adjustments. Therefore, choice C is the best answer.

If Consumer and Business Sentiment Were to Increase Dramatically, Causing