Question

What type of policy should the federal reserve use to counteract a rapid expansion that is causing high inflation

A. money creation
B. tight monetary policy
C. easy monetary policy
D. money multiplier

Answer 1

To address high inflation, the Federal Reserve should use a contractionary or tight monetary policy, which aims to reduce money supply and credit, raising interest rates and thus decreasing aggregate demand to stabilize prices.

Step-by-step explanation:

To counteract a rapid expansion causing high inflation, the Federal Reserve should use a contractionary monetary policy or a tight monetary policy. This kind of policy involves reducing the quantity of money and credit in the economy, which typically leads to higher interest rates. The goal of tightening monetary policy is to decrease aggregate demand, which can help to hold down inflation and stabilize prices. By contrast, an expansionary monetary policy is used to combat recession by boosting aggregate demand with lower interest rates and increased money supply. It’s important to note that monetary policy has long and variable lags in its effects and can be imprecise, but when faced with high inflation, contractionary measures are often appropriate.

In response to high inflation, the Federal Reserve should use a contractionary monetary policy. This type of policy seeks to reduce the quantity of money and credit and raise interest rates to hold down inflation. By doing so, the Federal Reserve aims to slow down the rapid expansion that is causing high inflation.

Answer 2

To counteract high inflation caused by rapid expansion, the Federal Reserve should use a contractionary monetary policy. This approach involves reducing the money supply and increasing interest rates to decrease demand and stabilize prices.

Step-by-step explanation:

To counteract a rapid expansion causing high inflation, the Federal Reserve should use a contractionary monetary policy or tight monetary policy. This type of policy aims to reduce the quantity of money and credit, thereby increasing interest rates to temper aggregate demand and curb inflation. It is the opposite of an expansionary monetary policy, which increases the money supply and decreases interest rates to stimulate economic growth.a

During periods of high inflation, if the central bank like the U.S. Federal Reserve, decides to slow the economic growth to prevent prices from rising too rapidly, they can implement contractionary measures. These measures might include raising the federal funds rate, which in turn increases other interest rates, making loans more expensive and thus reducing borrowing and spending.

It is important to note that monetary policy actions are filled with challenges, including long and variable lags in their effects, the inability to force banks to lend out their reserves, and unpredictable shifts in the velocity of money. Nevertheless, central banks must choose their policies carefully to stabilize the economy without causing undue harm.