**Transcription for Educational Website**---**Understanding Recessionary Gaps and Monetary Policy Actions**When a recessionary gap occurs in the short run, a new equilibrium can be established over time. This happens as input prices and expectations adjust downward. Such adjustments cause the short-run aggregate supply curve to shift downward and to the right, returning the equilibrium real GDP per year to its long-run value. To address a recessionary gap in the short term, the Federal Reserve can adopt a policy that boosts aggregate demand. **Question:**Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run?- **A.** The Fed can increase the money supply through an open market purchase of Treasury securities.- **B.** The Fed can lower taxes.- **C.** The Fed can increase the money supply through an open market sale of Treasury securities.- **D.** The Fed can decrease the money supply through an open market purchase of Treasury securities.---*Note:* This content is aimed at explaining concepts related to recessionary gaps and monetary policy, suitable for students of economics or finance.

Recessionary gap occurs when the short run equilibrium GDP is less than potential level of GDP. There are two ways to eliminate recessionary gap and reach the potential level of GDP. Expansionary fiscal policy Expansionary monetary policy. Fed conducts expansionary monetary policy to eliminate the recessionary gap from the economy. To conduct expansionary monetary policy, Fed increases the money supply. Fed can increase the money supply in economy by following ways. Open market purchase of Treasury securities. Decrease in discount rate Decrease in required reserve ratio. Hence, to eliminate the recessionary gap from the economy, the Fed increase the money supply through a open market purchase of Treasury securities. Answer: Option (A)

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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. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand. Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run? O A. The Fed can increase the money supply through an open market purchase of Treasury securities. O B. The Fed can lower taxes. OC. The Fed can increase the money supply through an open market sale of Treasury securities. O D. The Fed can decrease the money supply through an open market purchase of Treasury securities.

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. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand. Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run? O A. The Fed can increase the money supply through an open market purchase of Treasury securities. O B. The Fed can lower taxes. OC. The Fed can increase the money supply through an open market sale of Treasury securities. O D. The Fed can decrease the money supply through an open market purchase of Treasury securities.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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