Figure 11-5
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

Question

Figure 11-5 
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

Quizplus · Accepted Answer

At point b, the economy is operating above its potential GDP, indicating an inflationary output gap. The Federal Reserve can close the output gap by pursuing a contractionary monetary policy, which involves raising the interest rate to reduce aggregate demand. By doing so, the economy will shift leftward along the SRAS curve, which will decrease output and inflationary pressures, bringing the economy closer to its potential GDP.

Figure 11-5 -Refer to Figure 11-5. If the Economy Is at Point