Which of the following monetary policies would be appropriate to close a recessionary gap?
A) a tax cut
B) a decrease in government purchases
C) an increase in reserve requirements
D) the Fed purchasing U.S. government securities
E) the Fed raising the discount rate

Question

Quizplus · Accepted Answer

The appropriate monetary policy to close a recessionary gap would be to stimulate the economy by increasing the money supply. The Fed can achieve this by purchasing government securities from banks, which increases the reserves of the banks and provides them with more funds to lend out to businesses and individuals. This increase in lending can stimulate economic activity and help close the output gap. Therefore, the correct answer is D, the Fed purchasing U.S. government securities.

Which of the Following Monetary Policies Would Be Appropriate to Close