Figure 26-14
-Refer to Figure 26-14. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
A) lower interest rates.
B) raise interest rates.
C) lower income taxes.
D) raise income taxes.

Question

Figure 26-14 
-Refer to Figure 26-14. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
A) lower interest rates. 
B) raise interest rates. 
C) lower income taxes. 
D) raise income taxes.

Quizplus · Accepted Answer

Point B indicates that the economy is facing an inflationary gap, as output is beyond its potential level. To combat inflation, the Federal Reserve should use contractionary monetary policy, which involves raising interest rates to reduce borrowing and spending. This would decrease aggregate demand and shift the economy back towards its potential output level. Therefore, the appropriate monetary policy in this scenario would be to raise interest rates (option B).

Figure 26-14 -Refer to Figure 26-14. in the Figure Above, If the Above