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Figure: Monetary Policy II
-(Figure: Monetary Policy II) Refer to Figure: Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be:

Question

Use the following to answer questions:
Figure: Monetary Policy II

-(Figure: Monetary Policy II) Refer to Figure: Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be:

Quizplus · Accepted Answer

The short-run equilibrium at Y₂ is above potential GDP, indicating inflationary pressures. To eliminate this inflationary gap, monetary policy should be contractionary, which would shift the AD curve leftward causing a decrease in output and prices.

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