Question

Assume that because of a long policy lag, the Fed starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial ___________.

Answer 1

Answer: Recessionary gap to an inflationary gap

Explanation:

Recessionary gap is a macroeconomic term which explains an economy operating at a level lower than the full employment equilibrium.

Inflationary gap is a macroeconomic concept that explains the difference between the current level of real gross domestic product (GDP) and the expected GDP that would be experienced if an economy is at full employment.