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Figure: Monetary Policy I
-(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to sell Treasury bills, _____ shift to the _____ a(n) _____ gap.

Question

Use the following to answer questions :
Figure: Monetary Policy I

-(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to sell Treasury bills, _____ shift to the _____ a(n) _____ gap.

Quizplus · Accepted Answer

Selling Treasury bills is a contractionary monetary policy, which would decrease the money supply and cause interest rates to increase. This would lead to a leftward shift of the aggregate demand curve from AD₁ to AD₁, which would close the output gap and reduce inflationary pressures. The result would be a recessionary gap.

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