If the United States is in an inflationary gap, the appropriate policy is to _____ the money supply to _____ interest rates.

Question

Quizplus · Accepted Answer

An inflationary gap means that aggregate demand is greater than aggregate supply, leading to higher prices and output. To combat this, the appropriate policy is to decrease the money supply, which will increase interest rates. Higher interest rates will decrease consumer and business spending, reducing the demand-pull inflation causing the inflationary gap. Therefore, choice C is correct. Choices A and B would exacerbate the inflationary gap by increasing the money supply and potentially fueling inflation further. Choice D would have no effect on the inflationary gap as decreasing both the money supply and interest rates would not address the underlying issue of excessive aggregate demand.

If the United States Is in an Inflationary Gap, the Appropriate