Question

Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?

Monetary Policy (A) No change (B) Expansionary (C) Expansionary (D) Expansionary (E) Contractionary

Fiscal Policy Contractionary No change Contractionary Expansionary Expansionary

Answer 1

To maintain the price level and encourage greater investment at Full employment, Expansionary Monetary and Expansionary Fiscal Policy

Step-by-step explanation:

Expansionary monetary policy is enacted when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand. It boosts growth as measured by gross domestic product.

An expansionary fiscal policy is aimed at increasing the aggregate demand. This is achieved by the government through an increase in government spending and a reduction in taxes.

At full employment, the competition for companies to find skilled workers will increases causing a corresponding increase in wages. the ripple effect is increase in the cost of production.

Therefore, to maintain price level and increase investment, expansionary monetary and fiscal policy is applicable.