Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the trough of the recession.Then
A)the Fed's contractionary policy will result in too large of a decrease in GDP.
B)the Fed's contractionary policy will result in too small of a decrease in GDP.
C)the Fed's expansionary policy will result in too small of a decrease in GDP.
D)the Fed's expansionary policy will result in too large of an increase in GDP.

Question

Quizplus · Accepted Answer

If the Fed implements an expansionary policy after the economy has already started recovering from a recession, it can lead to an excessive increase in GDP, potentially causing inflationary pressures.

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