Final answer:
During economic expansion or at the peak, the Federal Reserve may take actions to stabilize the economy and control inflation by adjusting monetary policy. The Fed can manage the money supply and interest rates to influence investment and net exports. They have the flexibility to move from expansionary policies, like quantitative easing, to tapering such measures as the economy strengthens.
Step-by-step explanation:
During times of economic expansion or at the peak of the business cycle, the Federal Reserve (Fed) may choose to conduct monetary policy aimed at stabilizing the economy and controlling inflation. While the Federal Reserve Act does not provide direct guidance on how to address recessionary or inflationary gaps, or how to balance conflicting goals, the Fed has a range of tools at its disposal.
To carry out an expansionary monetary policy, the Fed can buy bonds, which increases the money supply, lowers interest rates, and boosts investment and net exports. This combination of effects shifts the aggregate demand curve to the right, helping to close a recessionary gap. However, during an expansion or at the peak, the Fed may consider tapering such policies, slowing down asset purchases, and potentially selling assets to reduce the money supply and prevent the economy from overheating.
For example, after the quantitative easing policies implemented during financial crises, such as the response to the pandemic in March 2020, the Fed eventually began to taper asset purchases to prevent excessive inflation and maintain economic stability. The shift from aggressive asset buying to tapering indicates the Fed's intent to shift from expansionary to more contractionary measures as the economy improves.