Explain the potential downfalls of the Fed implementing an expansionary monetary policy or contractionary monetary policy at the wrong time
What will be an ideal response?
The Fed would implement an expansionary monetary policy when the economy is entering a recession or is already in a recession in order to stimulate the economy and push actual GDP up to its potential. If timing is off and the economy has already started to recover from the recession, the impact of an expansionary monetary policy could actually overstimulate the economy and create inflationary pressure on the economy.
The Fed would implement a contractionary monetary policy when the economy is at or near potential GDP and prices are starting to rise in order to keep inflation in check while keeping GDP at or near its potential level. If timing is off and prices have already started to stabilize, the impact of a contractionary monetary policy could actually slow the economy down and push it towards recession.
You might also like to view...
Refer to Table 2-1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 24 pizzas and 30 calzones would appear
A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier.
A firm typically achieves its position as a monopolist as a result of
A) a small market and a constant average cost. B) a downward sloping demand for the product. C) barriers to entry. D) the absence of long-run profits in an industry.