Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is producing at Y₂, then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve should use _____ monetary policy. A) recessionary; actual; potential; expansionary B) recessionary; potential; actual; expansionary C) inflationary; actual; potential; contractionary D) inflationary; potential; actual; contractionary

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If the economy is producing at a level below its potential output (Y₂ indicates a level of output lower than the potential), it means that the actual output is less than the potential output, indicating a recessionary gap. In such a scenario, the Federal Reserve should use expansionary monetary policy to stimulate economic growth and move the actual output closer to the potential output.

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