Question

When output gap and inflation gap are positive, the Federal Reserve will adopt a/an

  contractionary fiscal policy.

  contractionary monetary policy.

  expansionary monetary policy.

expansionary fiscal policy

Answer 1

option 2

contractionary monetary policy.

A positive output gap means the actual output is above the potential output level.

An inflation gap is when inflation is increasing because of demand-pull inflation.

Both gaps are positive and that can be controlled by the decrease in the money supply and money supply can be decreased by the contractionary monetary policy.

A contractionary fiscal policy can also be used but that is not used by the Fed. it is used by the government.