Question

You learned in an earlier chapter that if a recessionary gap occurs in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust downward, causing the short-run aggregate supply curve to shift downward and to the right and pushing equilibrium real GDP per year back to its long-run value. In this chapter, you learned that the Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand.

a. Propose one monetary policy action that could eliminate the recessionary gap in the short run.

b. In what way might society gain if the Fed implements the policy you have proposed instead of simply permitting long-run adjustments to take place?

Short answer

a. An open market sale of government securities could eliminate the recessionary gap in the short run.

b. Inflationary tensions are eliminated rapidly which helps the general public assume the Federal Reserve executes the above arrangement rather than essentially allowing long-run changes in accordance to occur.

Step-by-step solution

introduction

Monetary policy is a macroeconomic approach set somewhere near the Central Bank which includes the administration of the supply of money and loan costs in the economy.

explanation part (a)

A higher loan fee infers that getting turns out to be more costly and the arrival of reserve funds is higher. Whenever Federal Reserve takes part in the offer of government protections in the open market, it prompts diminished money supply in the economy causing expanded loan costs.

explanation part (b)

One might say that when Federal Reserve diminishes the inventory of money in the economy, subsequently, expanding the paces of revenue happens along these lines diminishing the quantity of labor and products requested at each cost level