In which of the following situations would the Fed conduct contractionary moneta
ID: 1195605 • Letter: I
Question
In which of the following situations would the Fed conduct contractionary monetary policy? A. That said believes that aggregate demand was a growing too slowly to keep up with the potential GDP. B. The Fed fares that unemployment is climbing above the natural rate. C. The Fed is concerned that aggregate demand would continue to exceed the growth and potential GDP. D. The Fed is worried that deflation will become a problem. In which of the following situations would the Fed conduct contractionary monetary policy? A. That said believes that aggregate demand was a growing too slowly to keep up with the potential GDP. B. The Fed fares that unemployment is climbing above the natural rate. C. The Fed is concerned that aggregate demand would continue to exceed the growth and potential GDP. D. The Fed is worried that deflation will become a problem. contractionary monetary policy? A. That said believes that aggregate demand was a growing too slowly to keep up with the potential GDP. B. The Fed fares that unemployment is climbing above the natural rate. C. The Fed is concerned that aggregate demand would continue to exceed the growth and potential GDP. D. The Fed is worried that deflation will become a problem.Explanation / Answer
A)
When the aggregate demand is growing too slowly to keep up with the potential GDP, the economy will need an expansionary fiscal/monetary policy to boost the AD and increase output.
B)
When unemployment is climbing above the natural rate, it is required to increase AD and thus production to increase labor demand and thus decrease unemployment. This calls for the need of an expansionary policy.
C)
When the Fed is concerned that the aggregate demand would continue to increase and exceed the growth and potential GDP, it will require contractionary monetary policy to decrease AD (because of lower income or money at hand) and thus slow the pace of growth of GDP.
D)
Deflation means a fall in the price level of the economy, and generally points towards upcoming recession.
When the Fed is worried of falling prices, it will inject money into the economy using expansionary monetary policy which will raise AD and thus price level in the economy.