Use the following to answer questions .
Exhibit: Economic Adjustments
-(Exhibit: Economic Adjustments) If the economy is at point b, the Federal Reserve can close the output gap

Question

Use the following to answer questions .
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments) If the economy is at point b, the Federal Reserve can close the output gap

Quizplus · Accepted Answer

At point b, there is a positive output gap which indicates that there is excess demand. To close the output gap, the Federal Reserve needs to reduce aggregate demand which can be achieved by pursuing a contractionary monetary policy. This would involve increasing the interest rate which reduces investment and consumption spending, leading to a decrease in aggregate demand.

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