Question

A monetary policy that is "countercyclical" includes which of the following?

Select the two correct answers below.

Select all that apply:

• expansionary monetary policy in a recession

• contractionary monetary policy in a recession

• expansionary monetary policy when the economy is producing above potential GDP

• contractionary monetary policy when the economy is producing above potential GDP

Answer 1

The counter cyclical policies works just opposite of the current situation, the Fed uses the counter cyclical policies to correct the economic instability in the economy. In a period of recession the economic activity will be very low so the income of the people at this time the Fed would want to implement an expansionary monetary policy , that is increasing the money supply. The expansionary monetary policy will decrease the cost of borrowing and inject optimism in the economy. A contractionary monetary policy only worsen the situation of recession.

If the economy is producing above the potential GDP that is an inflationary gap and there might be inflationary pressures in the economy. To eliminate the inflationary gap ,a contractionary monetary policy is needed that is a decrease in the money supply.

Ans:

• Expansionary monetary policy in recession.
• Contractionary monetary policy when the economy is producing above potential GDP.

1