Question

Suppose the economy is operating below its full employment level. The Fed can

A. move the economy toward the full employment level by expanding the money supply to increase aggregate supply.

B.can move the economy toward the full employment level by expanding the money supply to increase aggregate demand and to hold prices constant.

C.can move the economy toward the full employment level by expanding the money supply to increase aggregate demand through both its direct and its indirect effects.

D.is powerless to affect either aggregate demand or aggregate supply. Fiscal policy is needed.

Answer 1

Option C

can move the economy toward the full employment level by expanding the money supply to increase aggregate demand through both its direct and its indirect effects

The economy is at below full employment means it is in recession. to stimulate the economy Fed uses expansionary policy which increases the money supply. It decreases the interest rate. The decrease in interest rate increases the consumption and investment spendings and it increases the aggregate demand and shifts it to the right where it increases the price level and real GDP. With constant prices, the effect will be higher than the full employment but the indirect effect is on the prices and that adjusts to some higher levels so the policy eliminates the recessionary gap.