Question

To try to eliminate a recessionary gap the Fed typically__________ the money supply, and to try to eliminate an inflationary gap the Fed typically __________ the money supply.

Answer 1

Answer: increase

decrease

Explanation: In case of recessionary gap, the GDP operates at a level below its equilibrium which results due to lack of investment. Investment in an economy can be increased with increasing money supply.

While, in case of inflation the money supply is decreased due to higher level of investment than potential level.