Problem: If there is a recessionary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust downward, causing the aggregated supply curve to shift downward & the right & pushing equilibrium real GDP back to its long run potential value. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that raises aggregate demand.
A) Purpose a monetary policy action that could eliminate a recessionary gap in the short run.
- reduce the required reserve ratio
- increase the discount rate relevant to the federal funds rate
- open market sale of securities
B) In what way might society gain if the Fed implements the policy you have proposed in of simply permitting long run adjustments to take place?
- cause equilibrium real GDP to increase more slowly
- cause inflation to decrease more quickly
- cause equilibrium real GDP to increase more quickly