If the Fed wished to eliminate an inflationary gap, which of the following would be an appropriate policy?

Question

Quizplus · Accepted Answer

To eliminate an inflationary gap, the Fed should implement a contractionary policy to decrease aggregate demand. One way to do this is by raising the federal funds rate, which increases the cost of borrowing for banks and reduces the amount of available credit in the economy, leading to a decrease in consumer and business spending. Decreasing the government budget deficit (A) would likely have little immediate effect on aggregate demand since it would take time to implement and may not directly impact private sector spending. Lowering the federal funds rate (C) would be the opposite of what is needed to combat an inflationary gap, as it would encourage more borrowing and spending. Buying government securities (D) would also be the opposite of what is needed, as it would inject more money into the economy and increase aggregate demand.

If the Fed Wished to Eliminate an Inflationary Gap, Which