If the economy is underutilizing its economic resources, the Fed should

Question

Quizplus · Accepted Answer

If the economy is underutilizing its economic resources, it means there is a gap between potential GDP and actual GDP. To close this gap, the Fed should expand the money supply to increase aggregate demand. This will encourage firms to produce more, hire more workers, and invest in capital goods, leading to an increase in employment, output, and income. It will also help to prevent deflation and support the price level. Discouraging investment spending, decreasing aggregate supply or contracting the money supply would only worsen the situation and lead to a deeper recession.

If the Economy Is Underutilizing Its Economic Resources, the Fed