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 government spending.
B) an increase in the discount rate.
C) a decrease in the money supply.
D) purchases 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 government spending. 
B) an increase in the discount rate. 
C) a decrease in the money supply. 
D) purchases of government securities in the open market.

Quizplus · Accepted Answer

Point g represents an increase in output and a decrease in unemployment, which is consistent with closing the recessionary gap at point f. The only policy option that can lead to an increase in output is through expansionary monetary policy, as shown by the shift from AD0 to AD1. This requires an increase in the money supply, which can be achieved through purchases of government securities in the open market. Therefore, the correct answer is D. A decrease in government spending (choice A) would shift the aggregate demand curve to the left, which would worsen the recessionary gap. An increase in the discount rate (choice B) would reduce investment spending and shift the AD curve to the left, leading to a contractionary rather than expansionary effect. A decrease in the money supply (choice C) would also reduce aggregate demand and worsen the recessionary gap.

Use the Following to Answer Questions