Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to buy Treasury bills, _____ shift to _____ a(n) _____ gap. A) AD₂ will; right, causing; inflationary B) AD₂ will; AD₁, causing; recessionary C) AD₁ will; AD₂, closing; recessionary D) AD₁ will; left, increasing; recessionary

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Quizplus · Accepted Answer

When the central bank buys Treasury bills, this increases the money supply and shifts the aggregate demand curve to the right from AD₁ to AD₂. This leads to a closing of the recessionary gap, as output and employment increase. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect because they suggest either an inflationary gap or a further deepening of the recessionary gap.

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