-Refer to Exhibit 15-l.One argument against the use of activist monetary policy claims that it can destabilize the economy.For example,suppose we are in a recessionary gap.Expansionary monetary policy is implemented,but there are so many lags that by the time it has its effect,self-regulation has already closed the gap by itself.The end result is a movement from point
A) B to point D.
B) B to point C.
C) B to point A.
D) A to point C.
E) C to point B

Question

-Refer to Exhibit 15-l.One argument against the use of activist monetary policy claims that it can destabilize the economy.For example,suppose we are in a recessionary gap.Expansionary monetary policy is implemented,but there are so many lags that by the time it has its effect,self-regulation has already closed the gap by itself.The end result is a movement from point
A) B to point D. 
B) B to point C. 
C) B to point A. 
D) A to point C. 
E) C to point B

Quizplus · Accepted Answer

The correct answer is A because if expansionary monetary policy is implemented during a recessionary gap but takes effect after the economy has already begun to self-regulate and close the gap, the additional stimulus could push the economy beyond its long-term sustainable output, moving it from a point of potential underutilization (B) to an overheated economy (D), rather than stabilizing at the natural level of output.

-Refer to Exhibit 15-L