5. An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contraction- ary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as monetary policy closes the recessionary gap? LRAS Aggregate price level SRAS E P1 AD, Y1 Y - Potential Real GDP output

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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5. An economy is facing the recessionary gap shown in the accompanying diagram.
To eliminate the gap, should the central bank use expansionary or contraction-
ary monetary policy? How will the interest rate, investment spending, consumer
spending, real GDP, and the aggregate price level change as monetary policy
closes the recessionary gap?
LRAS
Aggregate
price
level
SRAS
E1
P1
AD,
Y1 Y -
Potential Real GDP
output
Transcribed Image Text:5. An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contraction- ary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as monetary policy closes the recessionary gap? LRAS Aggregate price level SRAS E1 P1 AD, Y1 Y - Potential Real GDP output
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