The appropriate monetary policy in the event of a recessionary gap would be to

Question

Quizplus · Accepted Answer

The appropriate monetary policy in the event of a recessionary gap would be to engage in an open market purchase of U.S. government securities. This would increase the money supply, lower interest rates, and stimulate borrowing and spending, thus closing the recessionary gap. The other options listed would either have no effect or exacerbate the problem. Increasing the difference between the discount rate and the federal funds rate (Option A) would discourage borrowing and reduce spending, while increasing the difference between the federal funds rate and the required reserve ratio (Option C) would reduce the amount of money in circulation and make it harder for banks to lend. Raising the required reserve ratio (Option D) would also limit lending and reduce the money supply.

The Appropriate Monetary Policy in the Event of a Recessionary