Question

0/1 pts Question 3 If the economy is producing beyond its long-run capacity, with unemployment below the natural rate of unemployment, which type of policy is most likely to be conducted? • Expansionary Monetary Policy Contractionary Monetary Policy Pro cyclical Monetary Policy Show.me-the-Money-tary Policy All of the Above are equally likely

Answer 1

The correct answer here is contractionary monetary policy. This is because since the employment is already beyond the potential level of output, this implies that too much money is chasing too few goods in the economy due to which inflation is present. In order to bring back the economy at the potential level, we need to decrease the economic activity in the economy. This will be possible through contractionary monetary policy.

Also, procyclical and expansionary policies will increase the output gap furthur and will contribute to more inflation in the economy. Thus, there are not desirable options.

So the correct answer is contractionary monetary policy.