Faced with an inflationary gap, policy makers using AS/AD model would probably recommend a monetary policy that used an open market:
A) sale of government securities to reduce interest rates, expenditure and AD.
B) purchase of government securities to reduce interest rates and raise expenditure and AD.
C) sale of government securities to raise interest rates and reduce expenditure and AD.
D) purchase of government securities that raises interest rates but leaves AD unchanged.

Question

Quizplus · Accepted Answer

C) Sale of government securities to raise interest rates and reduce expenditure and AD is the correct approach to address an inflationary gap. This action reduces the money supply, increases interest rates, and consequently lowers spending, which helps to cool down the economy and reduce inflation.

Faced with an Inflationary Gap, Policy Makers Using AS/AD Model