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 Open market purchases
(B) Increasing the discount rate
(C) Increasing government spending
(D) Selling bonds
(E) Increase taxes

Question

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 Open market purchases
(B) Increasing the discount rate
(C) Increasing government spending
(D) Selling bonds
(E) Increase taxes

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To determine the appropriate monetary policy action that complements expansionary fiscal policy, we need to identify actions that increase the money supply and lower interest rates. ‖ ‖ step 2 ⋮ Open market purchases involve the central bank buying government securities, which increases the money supply and lowers interest rates. ‖ ‖ step 3 ⋮ Increasing the discount rate and selling bonds are contractionary policies, which would not aid in recovery. Increasing government spending and taxes are fiscal policies, not monetary policies. ‖ ***A*** ∻Key Concept∻ ⚹Monetary Policy Action⚹ ∻Explanation∻ ⚹Open market purchases increase the money supply and lower interest rates, aiding in economic recovery during a recession.◊What is the relationship between expansionary monetary policy and expansionary fiscal policy in closing the output gap?⍭ Generate me a similar question◊⚹

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