Question

Accommodative vs. Non-accommodative Monetary Policy: Suppose the economy is initially at potential output. A rapid increase in energy prices then pushes up the price level. What are the advantages and disadvantages of using accommodative and nonaccommodative monetary policy? In your answer, state the short- and long-run impacts of each policy on the price level and output. Use an aggregate demand graph for each policy option to support your answer.

Answer 1

Accomodative monetary policy is when central banks expand the money supply to boost the economy .

Monetary policies that are considered accomodative include lowering the federal funds rate  

These measures are meant to make money less expensive to borrow and encourage more spending.

Advantages :

• Federal funds rate are lowered
• Money supply is expanded to boost the economy.

Non accomodative monetary policy is a tool used by a central bank or other monetary authority that falls out of line with traditional measures.

Advantages :

• Helps control the money supply
• Helps in regulating reserves properly