ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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an expansionary policy to speed up the economy
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a contractionary policy to slow the economy before a crash
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Either A or B
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None of the above
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Detailed explanation-1: -When GDP in a nation is growing too fast, causing inflation to increase beyond a desirable rate of 2%, central banks will implement a contractionary monetary policy. The Federal Reserve, or any central bank, has three primary tools to reduce the money supply.
Detailed explanation-2: -A contractionary policy often results in the tightening of credit through increased interest rates, increased unemployment, reduced business investment, and reduced consumer spending.
Detailed explanation-3: -Manipulating Interest Rates The first tool used by the Fed, as well as central banks around the world, is the manipulation of short-term interest rates. Put simply, this practice involves raising/lowering interest rates to slow/spur economic activity and control inflation.
Detailed explanation-4: -Reduced inflation The inflation level is the main target of a contractionary monetary policy. By reducing the money supply in the economy, policymakers are looking to reduce inflation and stabilize the prices in the economy.