Which one of the following policies would be most appropriate if the economy is operating beyond its long-run potential capacity?
A)a shift to a more restrictive monetary policy
B)an increase in government expenditures,holding taxes constant
C)a reduction in reserve requirements
D)a reduction in taxes,holding government expenditures constant

Question

Quizplus · Accepted Answer

If an economy is operating beyond its long-run potential capacity, there may be upward pressure on prices and inflationary pressures. To address this, a shift to a more restrictive monetary policy, such as increasing interest rates, could help reduce the level of aggregate demand in the economy, which can help to moderate inflationary pressures. Options B, C, and D would all increase aggregate demand, which would exacerbate inflationary pressures.

Which One of the Following Policies Would Be Most Appropriate