If the output is too high,to achieve the medium run equilibrium,the central bank will
A)increases policy rate.
B)reduces policy rate.
C)increase money supply.
D)increases inflation rate.

Question

Quizplus · Accepted Answer

If the output is too high, it means there is excess demand in the economy which may lead to inflationary pressures. To achieve the medium run equilibrium, the central bank needs to reduce demand by increasing interest rates, which will increase the cost of borrowing and reduce consumption and investment spending. This will reduce aggregate demand and help to bring output back to the potential level in the medium run. Therefore, the best choice is to increase the policy rate (A).

If the Output Is Too High,to Achieve the Medium Run