To close a recessionary gap, the Federal Reserve typically lowers interest rates. This action aims to increase aggregate spending and promote a rise in short-run equilibrium output.
When the Fed lowers interest rates, borrowing becomes cheaper for consumers and businesses. As a result, spending increases as people are more likely to take loans for big purchases like homes and cars, and businesses are more likely to invest in expansion and new projects. This increase in spending boosts the overall demand in the economy, which can help to close the recessionary gap by moving the economy closer to its potential output.
In summary, the correct choice in this context would be that lowering interest rates increases aggregate spending and increases short-run equilibrium output.