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Accommodative vs. Nonaccommodative Monetary Policy: Suppose the economy is initially at potential output. A rapid increase...

Accommodative vs. Nonaccommodative Monetary Policy: Suppose the economy is initially at potential output. A rapid increase in energy prices then pushes up the price level. What are the advantages and disadvantages of using accommodative and nonaccommodative monetary policy? In your answer, state the short- and long-run impacts of each policy on the price level and output. Use an aggregate demand graph for each policy option to support your answer.

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Answer #1

In this question accomodative monetary policy is when central banks expand the money supply to boost the economy.

Monetary policies that are considered accomodative include lowering the federal funds rate

These measures are meant to make money less expensive to borrow and encourage more spending.

Advantages:

- Federal funds rate are lowered.

- Money supply is expanded to boost the economy

Non accomodative monetary policy is a tool used by a central bank or other monetary authority that falls out of line with traditional measures.

Advantages :

• Helps control the money supply

• Helps in regulating reserves properly

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