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    Inflationary gap

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    An economy is facing the inflationary gap shown in the ac­companying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and aggregate price level change as the monetary policy closes the inflationary gap?

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    Solution Preview

    The central bank can use contractionary monetary policy to eliminate the inflationary gap. The central bank could engage in an open-market sale of ...

    Solution Summary

    Inflationary gap is examined.