Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession. Then
- the Fed's contractionary policy will result in too large of a decrease in GDP.
- the Fed's expansionary policy will result in too large of an increase in GDP.
- the Fed's expansionary policy will result in too small of a decrease in GDP.
- the Fed's contractionary policy will result in too small of a decrease in GDP.