Figure 14-5
-Refer to Figure 14-5. To eliminate the output gap, policy makers could conduct

Question

Figure 14-5 
-Refer to Figure 14-5. To eliminate the output gap, policy makers could conduct

Quizplus · Accepted Answer

To eliminate the output gap, policy makers need to reduce aggregate demand, as seen in the diagram. Therefore, they should conduct an open market sale to raise interest rates, which will reduce investment spending and shift the aggregate demand curve to the left. Choice B is incorrect because lowering interest rates will stimulate investment spending and shift the short-run aggregate supply curve to the right, which will not help to eliminate the output gap. Choice C is incorrect because a purchase of bonds would increase money supply and lead to an increase in investment spending, thus shifting the aggregate demand curve to the right. Choice D is incorrect because lowering interest rates will again stimulate investment spending, which will shift the short-run aggregate supply curve to the right and not help to eliminate the output gap.

Figure 14-5 -Refer to Figure 14-5. to Eliminate the Output Gap, Policy