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Figure: Monetary Policy and the AD-SRAS Model
-(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:
A) a decrease in the money supply.
B) a rise in the discount rate.
C) an increase in the money supply.
D) sales of government securities in the open market.

Question

Use the following to answer questions:
Figure: Monetary Policy and the AD-SRAS Model 
-(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:
A) a decrease in the money supply. 
B) a rise in the discount rate. 
C) an increase in the money supply. 
D) sales of government securities in the open market.

Quizplus · Accepted Answer

To move from point f to point g, the economy needs an increase in aggregate demand to close the recessionary gap. One way to do this is by increasing the money supply, which would lower interest rates and stimulate spending and investment. Therefore, choice C, an increase in the money supply, is the best option. The other choices would have contractionary effects on the economy, which would move it further away from point g.

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