Suppose the government wants to eliminate a recessionary gap.Which of the following strategies should the Bank of Canada implement?
A) The Bank of Canada should increase the money supply and increase the interest rate.
B) The Bank of Canada should increase the money supply and decrease the interest rate.
C) The Bank of Canada should decrease the money supply and increase the interest rate.
D) The Bank of Canada should decrease the money supply and decrease the interest rate.

Question

Suppose the government wants to eliminate a recessionary gap.Which of the following strategies should the Bank of Canada implement?  
A) The Bank of Canada should increase the money supply and increase the interest rate. 
B) The Bank of Canada should increase the money supply and decrease the interest rate. 
C) The Bank of Canada should decrease the money supply and increase the interest rate. 
D) The Bank of Canada should decrease the money supply and decrease the interest rate.

Quizplus · Accepted Answer

To eliminate a recessionary gap, the Bank of Canada should implement expansionary monetary policy. This involves increasing the money supply and decreasing the interest rate to encourage borrowing and investment, which can stimulate aggregate demand and output. Therefore, choice B is the best option. Choice A, decreasing the money supply while increasing the interest rate, would be contractionary and could worsen the recessionary gap. Choice C, decreasing the money supply while increasing the interest rate, would also be contractionary and could worsen the recessionary gap. Choice D, decreasing the money supply and decreasing the interest rate, would be contradictory and not effective in stimulating aggregate demand and output.

Suppose the Government Wants to Eliminate a Recessionary Gap