To eliminate a contractionary gap,the Fed can __________ the money supply,which would __________.
A)increase; increase the interest rate and investment
B)increase; decrease the interest rate and increase investment
C)decrease; increase the interest rate and investment
D)decrease; decrease the interest rate and investment
E)decrease; increase the interest rate and decrease investment

Question

Quizplus · Accepted Answer

The contractionary gap refers to an output gap which occurs when the actual output level is below the potential output level. To eliminate this gap, the Fed can increase the money supply, which would decrease interest rates and increase investment by businesses. This would lead to an increase in output level and close the contractionary gap. Therefore, choice B is the correct answer.

To Eliminate a Contractionary Gap,the Fed Can __________ the Money