If the U.S. is in an inflationary gap, the appropriate policy is to _____ the money supply to _____ interest rates.

Question

Quizplus · Accepted Answer

In an inflationary gap, aggregate demand is greater than aggregate supply. To reduce the inflationary gap and return the economy to equilibrium, the appropriate policy is to decrease the money supply. This will increase interest rates, which will decrease consumption and investment expenditure and ultimately reduce the aggregate demand. Thus, a decrease in the money supply is the appropriate policy option.

If the US Is in an Inflationary Gap, the Appropriate Policy Is