Final answer:
The correct answer for how the Federal Reserve can expand the economy is by shifting the Aggregate Demand (AD) curve rightward. This expansionary move increases economic activity, closes the GDP gap during a recession, and leads to higher output and employment. Therefore, correct option is a.
Step-by-step explanation:
If the Federal Reserve wanted to expand the economy, it could implement a policy that would shift the Aggregate Demand (AD) curve to the right.
This shift would indicate an increase in the total amount of goods and services demanded across all price levels, thereby stimulating economic growth. The appropriate answer to the student's question would be 'a) Aggregate Demand (AD) curve; rightward shift'.
When expansionary fiscal policy, such as tax cuts or increases in government spending, is used, it leads to increased aggregate demand. In the short run, according to Keynesian economics, this would result in a shift of the AD curve to the right from AD to AD₁, causing a new level of equilibrium with higher output, increased employment, and a potential rise in the price level.
This shift moves the economy closer to its full-employment level of output, which helps to correct a recessionary gap.