Answer One Of The Following Options

Answer One Of The Following Options

Option A: Describe two of the three monetary policy tools that the Federal Reserve could use to help improve the economy if the economy is currently in an inflationary gap.

Option B: Describe the Keynesian transmission mechanism for a decrease in the money supply, assuming that no liquidity trap exists and that investment is not interest insensitive. What impact would this ultimately have on Real GDP and the price level?

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Option A

When there is an inflationary gap in the economy, the Federal Reserve is empowered to use various monetary and fiscal policy tools to help improve the economy. An inflationary gap is the amount that the actual GDP exceeds the GDP when there is total employment (Fender, 2012).

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