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
Which statement best describes expansionary monetary policy?
A
The government increases taxes and cuts government spending to reduce budget deficits and slow aggregate demand.
B
Firms increase production and investment in response to higher productivity, causing long-run aggregate supply to shift right.
C
A central bank decreases the money supply and/or raises short-term interest rates to reduce inflation by slowing aggregate demand.
D
A central bank increases the money supply and/or lowers short-term interest rates to stimulate aggregate demand and reduce unemployment (often used during recessions).
Verified step by step guidance1
Step 1: Understand the goal of expansionary monetary policy, which is to stimulate economic activity, especially during periods of recession or high unemployment.
Step 2: Recognize that expansionary monetary policy is implemented by the central bank, not the government, so changes in taxes or government spending are not part of this policy.
Step 3: Identify the tools used by the central bank, which include increasing the money supply and lowering short-term interest rates to make borrowing cheaper and encourage spending and investment.
Step 4: Connect how increasing the money supply and lowering interest rates lead to higher aggregate demand, as consumers and firms are more likely to spend and invest.
Step 5: Conclude that the best description of expansionary monetary policy is the central bank increasing the money supply and/or lowering short-term interest rates to stimulate aggregate demand and reduce unemployment.
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