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?
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18. Monetary Policy
Expansionary and Contractionary Monetary Policy
Multiple Choice
In macroeconomics, the primary purpose of a contractionary monetary policy is to:
A
Increase aggregate demand to reduce unemployment in a recession
B
Decrease aggregate demand to reduce inflationary pressure
C
Lower interest rates to stimulate borrowing and investment
D
Increase the money supply to boost consumption and real GDP
Verified step by step guidance1
Step 1: Understand the goal of contractionary monetary policy. It is typically used to reduce inflation by slowing down economic activity.
Step 2: Recall that contractionary monetary policy involves actions such as increasing interest rates or reducing the money supply.
Step 3: Recognize that increasing interest rates makes borrowing more expensive, which tends to reduce consumption and investment.
Step 4: Understand that reducing consumption and investment leads to a decrease in aggregate demand, which helps to lower inflationary pressures.
Step 5: Conclude that the primary purpose of contractionary monetary policy is to decrease aggregate demand to reduce inflation, not to increase aggregate demand or stimulate borrowing.
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