Figure 16-1 shows the short-run macroeconomic equilibrium of an economy. Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response?Figure 16-1

Question

Quizplus · Accepted Answer

The economy is experiencing a recessionary gap, where output is below potential output and unemployment is high. To address this, the appropriate monetary policy response would be to increase the money supply, which can be achieved through the purchase of government bonds. This would lower interest rates and increase investment and consumption, leading to an increase in output and a decrease in unemployment. Options A, B, and D would all decrease the money supply and exacerbate the recessionary gap, while option C would have no effect on the money supply or the economy.

Figure 16-1 Shows the Short-Run Macroeconomic Equilibrium of an Economy