Which monetary policy would be appropriate for closing a recessionary gap?
A) a tax cut
B) a decrease in government purchases
C) the sale of Canadian government securities by the Bank of Canada
D) the purchase of government securities by the Bank of Canada

Question

Which monetary policy would be appropriate for closing a recessionary gap?  
A) a tax cut 
B) a decrease in government purchases 
C) the sale of Canadian government securities by the Bank of Canada 
D) the purchase of government securities by the Bank of Canada

Quizplus · Accepted Answer

The purchase of government securities by the Bank of Canada is an expansionary monetary policy which increases the money supply, lowers interest rates, and encourages borrowing and spending. This, in turn, leads to increased aggregate demand and helps close a recessionary gap. A tax cut may also stimulate spending, but it may take longer to have an effect and may not be as targeted towards the sectors that need it most. A decrease in government purchases may actually exacerbate a recessionary gap by reducing aggregate demand further. The sale of Canadian government securities by the Bank of Canada is a contractionary policy which would further reduce aggregate demand and worsen a recessionary gap.

Which Monetary Policy Would Be Appropriate for Closing a Recessionary