Question

The Federal Reserve would most likely adopt a contractionary monetary policy in which economic situation?

A. When the economy is overheating and inflation is rising.
B. When the economy is weak and unemployment is high.
C. When the economy is stable and there is low inflation.
D. When the economy is growing slowly but steadily.

Answer 1

The Federal Reserve would adopt a contractionary monetary policy when the economy is overheating and inflation is rising, as this policy aims to reduce inflation by decreasing the money supply and increasing interest rates.

Step-by-step explanation:

The Federal Reserve would most likely adopt a contractionary monetary policy in the situation described by option A: When the economy is overheating and inflation is rising. In such scenarios, the Reserve aims to combat high inflation by decreasing the money supply and credit available in the economy. This is achieved by raising the interest rate, which consequently discourages borrowing for investment and consumption, leading to a shift in aggregate demand to the left. This shift is intended to lower the price level and, at least in the short run, cool down economic growth to prevent the economy from overheating.

Answer 2

The Federal Reserve would most likely adopt a contractionary monetary policy in an economic situation when the economy is overheating and inflation is rising.

Step-by-step explanation:

The Federal Reserve would most likely adopt a contractionary monetary policy in economic situation A when the economy is overheating and inflation is rising. Inflation can occur when there is excess demand in the economy, leading to rising prices. By implementing a contractionary monetary policy, the Federal Reserve aims to reduce the money supply and increase interest rates, which ultimately helps to cool down the economy and control inflation.