1. Suppose the economy is currently suffering from an output gap and the Federal Reserve uses an expansionary monetary policy to close that gap. Describe the short-run effect of this policy on the following.
The money supply curve
The money supply curve shifts to the right.
The equilibrium interest rate
The equilibrium interest rate falls.
Investment spending
Investment spending rises, due to the fall in the interest rate.
Consumer spending
Consumer spending rises, due to the multiplier process.
Aggregate output
Aggregate output rises because of the rightward shift of the aggregate demand curve.