To close a recessionary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.
A) increase; increase; left
B) decrease; decrease; left
C) increase; increase; right
D) decrease; decrease; right

Question

Quizplus · Accepted Answer

To close a recessionary gap, the Federal Reserve should increase the money supply, which will increase investment and consumer spending, ultimately shifting the aggregate demand curve to the right. This will increase aggregate output and employment, closing the recessionary gap. Option A (increase money supply, increase investment and consumer spending, shift to the left) is incorrect as increasing the money supply would shift the aggregate demand curve to the right, not left. Similarly, option B (decrease money supply, decrease investment and consumer spending, shift to the left) is incorrect as it would worsen the recessionary gap. Option D (decrease money supply, decrease investment and consumer spending, shift to the right) is incorrect as it would cause inflationary pressure, increasing the price level but not necessarily the output and employment levels.

To Close a Recessionary Gap Using Monetary Policy, the Federal