Question

Which of the following is appropriate monetary policy given a recession from a negative AD shock?

Select one:

a. Increase interest paid on reserves held at the Fed

b. Increases the discount rate

c. Buy government securities through open market operations

d. Increase the amount of required reserve ratio

Disinflation is more painful when the central bank:

Select one:

a. is not credible.

b. runs out of money.

c. increases the rate of inflation.

d. is credible.

When an increase in government spending leads to a decrease in private spending it is called:

Select one:

a. bad timing.

b. a drop in the bucket.

c. the implementation lag.

d. crowding out.

Answer 1

Ans: c) Buy government securities through open market operations

Explanation:

During the recessionary situation , the central bank adopts an expanssionary monetary policy. Under yhis policy, the central bank buys government securities through open market operations , decreases the required reserve ratio , decreases the discount rate, etc.

Ans: a) is not credible.

Explanation:

When the central bank  is not credible then there will be an impact on the money supply in the economy. As a result disinflation becomes more painful.

Ans: crowding out.

Explanation:

When an increase in government spending leads to a decrease in private spending it is called crowding out.