Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

Question

Quizplus · Accepted Answer

In a recessionary gap, the economy is producing below its potential level and therefore, the demand for goods and services is lower. To increase the demand, the central bank can implement an expansionary monetary policy, which involves decreasing the interest rates. Lower interest rates will incentivize borrowing and spending, thereby increasing the demand for goods and services. As a result, the bond prices will increase as more investors will invest in the stock market and move their assets out of bonds, causing a decrease in supply, which increases the bond prices. Therefore, the correct answer is C, which states that the expansionary monetary policy will decrease interest rates and increase bond prices.

Suppose the Economy Experiences a Recessionary Gap