Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the trough of the recession.Then

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When the economy is below potential GDP and the Fed implements an expansionary monetary policy after the trough of the recession, the goal is to stimulate economic growth. However, if the timing is off and the economy is already recovering, this policy could lead to an overheating of the economy, resulting in too large of an increase in GDP. This is because the additional stimulus might push the economy beyond its sustainable capacity, leading to inflationary pressures.

Suppose That the Economy Is Producing Below Potential GDP and the Fed