Choose From A to D for the box above. B) Choose the correct answer from the brac

Question

Choose From A to D for the box above.

B) Choose the correct answer from the brackets:

Continuing with the previous problem, suppose Y1 = potential GDP. After Congress cuts government spending, in order to restore output to its potential level, the Fed should attempt to

( increase/decrease/Demand/Supply) the interest rate in order to (increase/decrease/Demand/Supply) Aggregate  increasedecreaseDemandSupply.

In order to accomplish the desired change in the interest rate, the Fed should ( increase/decrease/Demand/Supply) the money supply.

Explanation / Answer

When fiscal policy is contractionary and you want raise GDP, monetary policy comes into play where interest rates are decreased to encourage borrowings which increases AD.

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