Monetary Policy : This policy is used by the central bank to control the liquidity of money from an economy to bring the economy to a stable condition. This is done through management of interest rate and the money supply. Expansionary Monetary Policy: This policy is used by the government to expand the money supply in the economy. Money supply is increased by reducing the interest rate, as lower interest rates will encourage people to borrow more. Contractionary Monetary Policy: This policy is used by the government to contract the money supply from the economy. Money supply is reduced by increasing the interest rate, as higher interest rates will de-motivate people to borrow. Inflationary gap: At the level of full employment, if the value of the real GDP is greater than the value of the potential GDP, it leads to emergence of inflationary gap. Recessionary gap: At the level of full employment, if the value of the potential GDP is greater than the value of the real GDP, it leads to emergence of recessionary gap.

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Chapter 19, Problem 5P

To determine

Concept Introduction:

Monetary Policy: This policy is used by the central bank to control the liquidity of money from an economy to bring the economy to a stable condition. This is done through management of interest rate and the money supply.

Expansionary Monetary Policy: This policy is used by the government to expand the money supply in the economy. Money supply is increased by reducing the interest rate, as lower interest rates will encourage people to borrow more.

Contractionary Monetary Policy: This policy is used by the government to contract the money supply from the economy. Money supply is reduced by increasing the interest rate, as higher interest rates will de-motivate people to borrow.

Inflationary gap: At the level of full employment, if the value of the real GDP is greater than the value of the potential GDP, it leads to emergence of inflationary gap.

Recessionary gap: At the level of full employment, if the value of the potential GDP is greater than the value of the real GDP, it leads to emergence of recessionary gap.

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