Question

If the fed believes the economy is about to fall into​ recession, it should

a. use a contractionary monetary policy to lower the interest rate and shift ad to the left.
b. use an expansionary monetary policy to lower the interest rate and shift ad to the right.
c. use an expansionary fiscal policy to increase the interest rate and shift ad to the right.
d. use its judgment to do nothing and let the economy make the self adjustment back to potential gdp. if the fed believes the inflation rate is about to​ increase, it should
a. use a contractionary monetary policy to increase the interest rate and shift ad to the left.
b. use an expansionary monetary policy to lower the interest rate and shift ad to the right.
c. use a contractionary fiscal policy to increase the interest rate and shift ad to the left.
d. use a combination of tax increases and spending cuts to keep the budget balanced. click to select your answer.

Answer 1

If the Fed believes the economy is about to fall into​ recession, it should use an expansionary monetary policy to lower the interest rate and shift AD to the right. When using an expansionary monetary policy a central bank will use its tools to stimulate the economy. They increase the supply of money, lower interest rates and increase aggregate demand.