Question

Assume that because of a long policy lag, the government starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial

a. recessionary gap to an even deeper recessionary gap.
b. recessionary gap to an inflationary gap.
c. inflationary gap to the natural level of Real GDP.
d. inflationary gap to a recessionary gap

Answer 1

b. recessionary gap to an inflationary gap.

Step-by-step explanation:

This is because, since the economy was already healing itself steadily but slowly, reaching the natural level of the GDP was expected. However, an implementation of the expansionary monetary policy will only increase the nominal GDP (due to the increase in money supply), not the real GDP since only the monetary value of goods and services is likely to increase, not the physical amount of the goods.