Question

Congress has decided to extend unemployment compensation for those without jobs to 20 weeks because our unemployment rate is 10.2%. Food banks around the nation are reporting that a record number of families are requesting assistance

What monetary policy action should be taken?


Decrease government spending
Decrease government spending

Sell government securities (bonds)
Sell government securities (bonds)

Lower the discount rate
Lower the discount rate

Lower taxes
Lower taxes

Answer 1

During a period of high unemployment, the most suitable monetary policy action would be to lower the discount rate as part of an expansionary monetary policy to stimulate economic growth and lower unemployment.

Step-by-step explanation:

Given the scenario of a 10.2% unemployment rate and increasing demand for food banks, the most appropriate action from a monetary policy perspective would be to lower the discount rate. Lowering the discount rate is part of an expansionary monetary policy, intended to encourage borrowing by making it cheaper for banks to obtain funds from the central bank, ultimately increasing the money supply. On the contrary, selling government securities would be a contractionary policy, not suitable for economic downturns.

Lowering the discount rate would spur economic growth by encouraging banks to lend more, which can stimulate consumption and investment, leading to job creation and lower unemployment. This approach aligns with the need for expansionary policies during recessions, as indicated in point 5 about calling on expansionary fiscal policy or expansionary monetary policy to stimulate output and decrease unemployment. This action would complement automatically stabilizing measures like increased unemployment insurance and food stamp provisions, offering broad support to the economy.