Question

If there is a recessionary gap in the short​ run, the Federal Reserve can eliminate the gap in the short run by undertaking a policy action that raises aggregate demand.​ But, if Federal Reserve chooses not to close the gap in the short​ run, the economy will eventually get back to full employment in the long run. Because when there is a recessionary gap in the short​ run, then in the long run a new equilibrium will arise as input prices and expectations adjust​ downward, causing the aggregate supply to shift downward and to the right and pushing equilibrium real GDP back to its​ long-run potential value.

a. A monetary policy action that could eliminate a recessionary gap in the short run is an open market sale of government securities a decrease in the required reserve ratio a decrease in taxes .
b. If Fed implements the short run monetary policy option instead of simply waiting for the long​ -run adjustments to take​ place, then it

Answer 1

D. harms the society by interfering with the economy's natural process.

Step-by-step explanation:

In order to get out of recession, the fed should reduce the tax rates, which would in return lead to higher disposable income of the consumers, and then there will be an increase in the demand.

On the other hand the sale of bonds would even further increase the recession, as there will be more cash crunch in the economy. A decrease in reserve ratio will be a long time taking solution, so it would not provide an immediate solution.

MCQ

But, if the fed interferes with the short run equilibrium in the hope of giving short run benefits, it will hamper the economy's natural process to attain a new equilibrium as discussed in the paragraph above. Hence, option D is the correct answer

Option A and C are incorrect, because, employment is not much affected with lowering of income tax. On, the other hand, inflation levels rise, when there is a cut in income tax, as it gives more currency in the economy, hence even C is incorrect.