Based on the figure below. An economy is currently in long-run equilibrium at point B, at an inflation rate of π',which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ___ creating _____gap. A) A; an expansionary B) A; a recessionary C) D; a recessionary D) D; an expansionary

Question

Quizplus · Accepted Answer

In order for policymakers to reduce inflation, they must tighten monetary policy by shifting its policy reaction function upward, which shifts aggregate demand left. This new short-run equilibrium will exist at point A, where the economy is experiencing a recessionary gap.

Based on the Figure Below