Suppose the Fed wishes to use monetary policy to close an expansionary gap.

1. Should the Fed increase or decrease the money supply?
2. If the Fed uses open-market operations, should it buy or sell government securities?
3. Determine whether each of the following increases, decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.