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Figure: Monetary Policy II
-(Figure: Monetary Policy II) Look at the figure Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be:

Question

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

-(Figure: Monetary Policy II) Look at the figure Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be:

Quizplus · Accepted Answer

To eliminate the inflationary gap, the economy needs to move from the short-run equilibrium at Y₂ to the long-run equilibrium at YS2U2B22S2U2B0. This means reducing aggregate demand, which can be achieved through contractionary monetary policy such as increasing interest rates, reducing the money supply, or increasing reserve requirements. Therefore, the best choice is B, contractionary.

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