Question

explain whether the federal reserve should be currently conducting expansionary or contractionary policy and why?

Answer 1

After the financial crisis, the United States is on a path of recovery, but the growth rate of real GDP and increase in unemployment is at a slow pace. Inflation rate has decreased from 2.65% in 2017 to 2.38% in 2018 (Data source: Statistica website). This signifies that aggregate demand is not exhibiting sufficient increase. Therefore, Fed can increase aggregate demand to raise economic growth rate by exercising an expansionary monetary policy, by purchasing federal securities in open market. This will increase money supply and lower interest rate, which will boost investment demand the the portion of consumption demand financed by borrowing. Together, these will raise aggregate demand, increasing real GDP and inflation rate.