Question

Between 1999 and 2000 the Federal Reserve raised interest rates 5 times. This is an example...

Between 1999 and 2000 the Federal Reserve raised interest rates 5 times. This is an example of
A. discretionary fiscal policy.

B. nondiscretionary fiscal policy.

C. expansionary monetary policy.

D. contractionary monetary policy.

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Answer #1

Option D

  • The raising of interest rates by federal reserve 5times is an Example of contractionary monetary policy.
  • The contractionary monetary policy is a policy used by the federal reserve as a tool to overcome inflation.
  • If the Economy is under the influence of high inflation it means that the money supply has increased in the Economy which has increased the reserves in the bank.
  • During this time, the federal reserve uses the contractionary monetary policy to fight against inflation by decreasing the money supply to make lending more expensive or to increase the cost of borrowing.
  • This policy would then decrease the GDP level of an overheated Economy and will bring down the inflation rate.
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