Suppose the Fed wishes to use monetary policy to close an expansionary gap.
a. Should the Fed increase or decrease the money supply? The government needs to decrease the money supply to close the expansionary gap.
b. If the Fed uses open-market operations, should it buy or sell government securities? They should sell securities
c. Determine whether each of the following increases, decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP. The market interest rate increases, the quantity of money demanded decreases, investment spending decreases, aggregate demand decreases; potential output remains unchanged, price level decreases, and the equilibrium real GDP decreases.