If the short-run equilibrium output of the United States exceeds the potential output,the Fed:
A)employs an active monetary policy to close a recessionary gap.
B)employs an active monetary policy to close an expansionary gap.
C)relies on a passive approach to close a recessionary gap.
D)relies on a passive approach to close an expansionary gap.
E)employs an expansionary fiscal policy.

Question

Quizplus · Accepted Answer

If the short-run equilibrium output of the United States exceeds the potential output, it means there is an expansionary gap (also called inflationary gap) which leads to high inflationary pressure. In this situation, the Fed needs to use an active monetary policy to close the expansionary gap by reducing the money supply, increasing interest rates, and decreasing aggregate demand to bring the economy back towards potential output level.

If the Short-Run Equilibrium Output of the United States Exceeds