If there is an inflationary gap, what is the proper monetary ...

[kodithompson]

If there is an inflationary gap, what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability?
 
  What will be an ideal response?

Question 2

The national debt is the amount
 
  A) by which government outlays exceed tax revenue in a given year.
  B) by which government tax revenue exceed outlays in a given year.
  C) of government outlays summed over time.
  D) of debt outstanding that arises from past budget deficits.
  E) of all future entitlement spending.

[macagnavarro]

Answer to Question 1

An inflationary gap occurs when real GDP exceeds potential GDP. With no action by the Fed, the inflationary gap will be closed by inflation occurring as the money wage rate rises and aggregate supply decreases. In order to avoid the inflation, the Fed needs to decrease aggregate demand and thereby decrease real GDP back to potential GDP. To decrease aggregate demand, the Fed must raise the federal funds rate. To do so, the Fed can sell government securities in an open market operation.

Answer to Question 2

D

[kodithompson]

YES! Correct, THANKS for helping me on my review

[yeungji]

Excellent