To eliminate the output gap shown in the figure below,with a view to prevent inflation from emerging,the central bank should take a(n)_______ and _______ the official interest rate by a sufficient amount.If successful,such a policy may be expected shift the expenditure line _______.
A) expansionary monetary policy action;raise;down
B) contractionary monetary policy action;raise;down
C) expansionary monetary policy action;lower;down
D) contractionary monetary policy action;raise;up
E) expansionary monetary policy action;raise;up

Question

To eliminate the output gap shown in the figure below,with a view to prevent inflation from emerging,the central bank should take a(n)_______ and _______ the official interest rate by a sufficient amount.If successful,such a policy may be expected shift the expenditure line _______. 
A) expansionary monetary policy action;raise;down 
B) contractionary monetary policy action;raise;down 
C) expansionary monetary policy action;lower;down 
D) contractionary monetary policy action;raise;up 
E) expansionary monetary policy action;raise;up

Quizplus · Accepted Answer

To eliminate the output gap and prevent inflation, the central bank should adopt a contractionary monetary policy action, which involves raising the official interest rate by a sufficient amount. By doing so, the cost of borrowing increases, which reduces consumption and investment spending, hence shifting the expenditure line downwards.

To Eliminate the Output Gap Shown in the Figure Below,with