Multiple Choice
In macroeconomics, the primary purpose of expansionary monetary policy is to increase which of the following?
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18. Monetary Policy
Expansionary and Contractionary Monetary Policy
Multiple Choice
In the context of expansionary and contractionary monetary policy, when inflation is high, the Federal Reserve aims to slow the economy by using which type of policy?
A
Expansionary fiscal policy (e.g., increasing government spending)
B
A balanced budget policy (keeping taxes and spending unchanged) specifically designed to reduce inflation
C
Contractionary monetary policy (e.g., raising the target federal funds rate)
D
Expansionary monetary policy (e.g., lowering the target federal funds rate)
Verified step by step guidance1
Step 1: Understand the goal of the Federal Reserve when inflation is high. The Fed aims to slow down economic activity to reduce inflationary pressures.
Step 2: Recall the difference between expansionary and contractionary monetary policies. Expansionary monetary policy is used to stimulate the economy, while contractionary monetary policy is used to slow it down.
Step 3: Identify the tools of monetary policy. The Federal Reserve can influence the economy by adjusting the target federal funds rate, which affects borrowing costs and overall spending.
Step 4: Recognize that when inflation is high, the Fed raises the target federal funds rate to make borrowing more expensive, reducing spending and investment, which slows economic growth.
Step 5: Conclude that the appropriate policy in this context is contractionary monetary policy, such as raising the target federal funds rate, to combat high inflation.
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