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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap
A) by pursuing an expansionary monetary policy to raise the interest rate and increase short-run aggregate supply.
B) by pursuing a contractionary monetary policy to drive down the interest rate and increase aggregate demand.
C) by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.
D) by pursuing a contractionary monetary policy to raise the interest rate and short-run aggregate supply.

Question

Use the following to answer questions .
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply 
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap
A) by pursuing an expansionary monetary policy to raise the interest rate and increase short-run aggregate supply. 
B) by pursuing a contractionary monetary policy to drive down the interest rate and increase aggregate demand. 
C) by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand. 
D) by pursuing a contractionary monetary policy to raise the interest rate and short-run aggregate supply.

Quizplus · Accepted Answer

At point c, the economy is producing below potential output (Yp) due to a recessionary gap (Yp - Y). To close this output gap and increase real GDP, the Federal Reserve can pursue an expansionary monetary policy, which involves increasing the money supply and lowering interest rates. This will stimulate aggregate demand (AD), leading to an increase in both short-run and long-run aggregate supply. Therefore, choice C is the best answer.

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