Figure 10-8
-Refer to Figure 10-8. If the economy is at point b, the Federal Reserve can close the output gap

Question

Figure 10-8 
-Refer to Figure 10-8. If the economy is at point b, the Federal Reserve can close the output gap

Quizplus · Accepted Answer

The output gap at point b indicates that the economy is producing above potential output, which could lead to inflation. To close the output gap, the Federal Reserve needs to pursue a contractionary monetary policy, which involves raising the interest rate to reduce aggregate demand. This will help to reduce excess demand, and bring the economy back to potential output level. Therefore, option D is the correct answer.

Figure 10-8 -Refer to Figure 10-8. If the Economy Is at Point