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Posted 7 months ago
The economy of Mithrim is experiencing a severe recession. As a result, the government is conducting expansionary fiscal policy. The central bank of Mithrim is considering expansionary monetary policy to aid in the recovery efforts.
Which of the following is an example of a monetary policy action that would work with the expansionary fiscal policy to close the output gap?
Choose 1 answer:
(A) Increasing government spending
(B) Increasing the discount rate
(C) Increase taxes
(D) Selling bonds
(E) Open market purchases
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Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
Identify the type of policies described in the question: Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate the economy. Expansionary monetary policy involves actions by the central bank to increase the money supply and lower interest rates to stimulate economic activity
step 2
Analyze the answer choices in the context of monetary policy: (A) Increasing government spending is a fiscal policy action. (B) Increasing the discount rate is a contractionary monetary policy action. (C) Increasing taxes is a fiscal policy action. (D) Selling bonds is typically a contractionary monetary policy action. (E) Open market purchases refer to the central bank buying securities to increase the money supply, which is an expansionary monetary policy action
step 3
Select the monetary policy action that complements expansionary fiscal policy: To complement expansionary fiscal policy and address an output gap during a recession, the central bank would undertake expansionary monetary policy actions, such as open market purchases to increase the money supply and lower interest rates
Answer
E
Key Concept
Expansionary monetary policy
Explanation
Open market purchases by the central bank increase the money supply and lower interest rates, complementing expansionary fiscal policy to stimulate economic activity and close an output gap during a recession.
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