If the economy is in an inflationary gap, the Federal Reserve should conduct _____ monetary policy to _____ aggregate demand.
A) contractionary; decrease
B) contractionary; increase
C) expansionary; decrease
D) expansionary; increase

Question

Quizplus · Accepted Answer

If the economy is in an inflationary gap, it means that the aggregate demand is higher than the available aggregate supply. To reduce the demand and bring it back in line with supply, the Federal Reserve should conduct contractionary monetary policy, which involves decreasing the money supply, increasing interest rates, and reducing spending. This will help reduce inflationary pressures and stabilize the economy.

If the Economy Is in an Inflationary Gap, the Federal