Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the peak of the boom.Then

Question

Quizplus · Accepted Answer

If the economy is already producing above potential GDP, there is already an inflationary pressure in the economy. If the Fed implements contractionary policy after the economy has passed the peak of the boom, it may result in too large of a decrease in GDP, which could lead to a recession. This is because the Fed's contractionary policy may result in a decrease in consumer spending, investment, and employment, which would further decrease output and increase unemployment. Therefore, the correct answer is A.

Suppose That the Economy Is Producing Above Potential GDP and the Fed