If the economy is producing a real output that is less than capacity output, a(n):
A)expansionary monetary policy could be used to decrease aggregate demand and decrease the general price level
B)contractionary monetary policy could be used to increase aggregate demand and increase the general price level
C)contractionary monetary policy could be used to decrease aggregate demand and decrease the general price level
D)expansionary monetary policy could be used to increase aggregate demand and increase the general price level

Question

Quizplus · Accepted Answer

If the economy is producing a real output that is less than capacity output, it means there is a recessionary gap or an output gap. In this situation, the government could use expansionary monetary policy to increase aggregate demand, which would result in an increase in real output and potentially increase the general price level. Option D is the only one that correctly identifies the use of expansionary monetary policy in this situation.

If the Economy Is Producing a Real Output That Is