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

Question

Quizplus · Accepted Answer

During a recessionary gap, there is a decrease in aggregate demand, causing a decrease in overall economic activity. Expansionary monetary policy, such as increasing the money supply or decreasing interest rates, can help stimulate economic growth. In this case, decreasing interest rates will make it cheaper for consumers and businesses to borrow money, increasing spending and investment, which will lead to an increase in aggregate demand. Additionally, decreasing interest rates will make the currency less attractive to foreign investors, leading to a decrease in its exchange rate. Therefore, the correct answer is D: decrease interest rates and decrease exchange rates.

Suppose the Economy Experiences a Recessionary Gap