A monetary tightening is successful at reducing inflation because the central bank allows ___________ to develop,so firms become more reluctant to ___________ in the face of weak demand.
A) a recessionary gap;raise prices
B) an expansionary gap;raise prices
C) a recessionary gap;lower prices
D) an expansionary gap;lower prices
E) no output gap;keep prices constant

Question

Quizplus · Accepted Answer

A monetary tightening leads to a recessionary gap, where actual output is less than potential output, causing weak demand. This makes firms more reluctant to raise prices, thus reducing inflation.

A Monetary Tightening Is Successful at Reducing Inflation Because the Central