Choose From A to D for the box above. B) Choose the correct answer from the brac
ID: 1202939 • Letter: C
Question
Choose From A to D for the box above.
B) Choose the correct answer from the brackets:
Continuing with the previous problem, suppose Y1 = potential GDP. After Congress cuts government spending, in order to restore output to its potential level, the Fed should attempt to
( increase/decrease/Demand/Supply) the interest rate in order to (increase/decrease/Demand/Supply) Aggregate increasedecreaseDemandSupply.
In order to accomplish the desired change in the interest rate, the Fed should ( increase/decrease/Demand/Supply) the money supply.
Explanation / Answer
When fiscal policy is contractionary and you want raise GDP, monetary policy comes into play where interest rates are decreased to encourage borrowings which increases AD.