Final answer:
The increase in interest rates by the Federal Reserve in March 2023 is indicative of a contractionary monetary policy aimed at tempering inflation and slowing economic activity. The correct answer is option b.
Step-by-step explanation:
When analyzing monetary policy decisions such as the one made by the Federal Reserve in March 2023, it is essential to understand the objectives behind such moves. A rise in interest rates by the Federal Reserve signifies a contractionary monetary policy. This policy is usually implemented to slow down economic activity, particularly when there is a threat of inflation or when the economy is producing near its potential Gross Domestic Product (GDP). The expectation is that higher interest rates will discourage borrowing and spending, leading to a decrease in aggregate demand, which in turn could lower price levels and temper inflationary pressures.
Contrastingly, an expansionary monetary policy involves lowering interest rates to stimulate the economy by encouraging borrowing and investment. However, in the given scenario where the Federal Reserve has increased interest rates, the aim is clearly to execute a contractionary approach to address issues like inflation and to prevent overheating of the economy, especially if government fiscal policy is leading to large budget deficits. This form of policy may also lead to crowding out, where government borrowing absorbs a significant portion of the available credit in the economy, making less credit available for private investment.
In essence, the action taken by the Federal Reserve in March 2023 is indicative of a strategy to address potential inflationary impacts and balance economic growth, which makes option (b) contractionary the correct choice based on the provided information and historical context of the Federal Reserve's monetary policies.