Question

To close a recessionary gap using monetary policy, the Federal Reserve should ________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________.

Answer 1

Monetary policy is an instrument that gives the Fed the ability to manipulate the amount of money in circulation in the economy according to the needs of the economic environment. In times of inflation, the Fed withdraws money from circulation, but in times of recession, the Fed can inject money into the economy.

To close a recessionary gap using monetary policy, the Federal Reserve must increase the money supply to stimulate investment and consumer spending and shift the aggregate demand curve to the right.

Remember that graphically, the demand curve represents the sum of the aggregate demand (of all consumers) of the economy. Thus, when demand increases, the curve shifts to the right.