Recessions and Economic Booms

Monetary Policy Response

Recessionary Gap

• In a recession the central bank should use

  expansionary

  ---

  monetary policy which means an

  increase

  ---

  in money supply and a

  decrease

  ---

  in interest rates. This would cause Consumption (C), Investment (I), Net Exports (NX), and Aggregate Demand to

  increase

  ---

Inflationary Gap (Boom)

• In an economic boom there is usually high inflation so the central bank would use

  contractionary

  ---

  monetary policy which means a

  decrease

  ---

  in money supply and an

  increase

  ---

  in interest rates. This would cause Consumption (C), Investment (I), Net Exports (NX), and Aggregate Demand to

  decrease

  ---