Question

The Fed uses Monetary policy to correct for inflation by raising the discount rate and the government uses Fiscal policy to correct for inflation cutting government spending.

a) Contractionary
b) Expansionary
c) Real GDP should decrease, Inflation should decrease
d) Real GDP should increase, Inflation should decrease

Answer 1

The correct answer is (b) Contractionary monetary policy. Monetary policy refers to the actions taken by a central bank, such as the Federal Reserve in the United States, to control the money supply and interest rates in order to stabilize the economy. Contractionary monetary policy aims to reduce inflation and slow down economic growth by decreasing the supply of money and credit in the economy.

Step-by-step explanation:

Monetary policy refers to the actions taken by a central bank, such as the Federal Reserve in the United States, to control the money supply and interest rates in order to stabilize the economy. Contractionary monetary policy aims to reduce inflation and slow down economic growth by decreasing the supply of money and credit in the economy. This is done by raising interest rates, which discourages borrowing for investment and consumption and shifts aggregate demand to the left. As a result, the price level decreases and, at least in the short run, real GDP also decreases.