Question

Draw two money market graphs ( money supply & money demand) that demonstrates how the Fed closes the inflationary gap, and also a recessionary gap.

Answer 1

situation where the economy is producing Inflationary gap refers to a more than its full employment level of GDP. In order to correct for this gap, the Fed adopts a contractionary monetary policy, like increasing the supply curve, shifting it to the left. A fall in money supply reduces purchasing power of individuals, serve ratio or engaging in open market sale of securities. This reduces the money which in turn shifts their AD curve to the left, bringing the economy back to its full employment level of output CORRECTING FOR RECESSIONARY GAP MS MS1 MD CORRECTING FOR INFLATIONARY GAP MS MS MD Contractionary gap refers to a situation where the economy is producing less than its full employment level of GDP. In order to correct for this gap, the Fed adopts an expansionary monetary policy, like decreasing the reserve ratio or increases the money supply curve, shifting it to the right. An increase in money supply increases the engaging in open market purchase of securities. This purchasing power of individuals, which in turn shifts their AD c economy back to its full employment level of output. urve to the right, bringing the