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Figure: Monetary Policy and the AD-SRAS Model
-(Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy and the AD-SRAS Model. If the economy is in an inflationary gap at point h, it can move to point i as a result of:

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Figure: Monetary Policy and the AD-SRAS Model 
-(Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy and the AD-SRAS Model. If the economy is in an inflationary gap at point h, it can move to point i as a result of:

Quizplus · Accepted Answer

If the economy is in an inflationary gap at point h, there is excess demand and firms are producing at a rate higher than the potential output. To reduce the inflationary pressure, the central bank needs to reduce aggregate demand. One way to achieve this is by decreasing the money supply through actions like selling government securities in the open market or increasing the reserve requirements. Therefore, choice C (a decrease in the money supply) is the correct answer. A, B, and D would all lead to an increase in aggregate demand and further exacerbate the inflationary gap.

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