Question

In which situation would contractionary monetary policy be most appropriate?

The economy has been in a long recession, but signs of improvement are starting to appear.

A crisis overseas has led to a spike in oil prices, causing the prices of gasoline and other goods to increase.

Businesses worry that shoppers are being very cautious about their spending because they are concerned about job security.

Consumer confidence is very strong, leading to a record holiday shopping season, despite fewer discounts being offered.

Answer 1

Consumer confidence is very strong, leading to a record holiday shopping season, despite fewer discounts being offered.

Higher consumer spending, encouraged by high consumer confidence and demonstrated by high record holiday shopping, typically presages higher inflation. To prevent an inflationary rising prices, the federal reserve may raise interest rates to discourage spending.