Question

In which of the following cases will expansionary monetary policy be more effective at pulling an economy out of recession? Assume that the monetary expansion will result in a 5% inflation rate. Choose one or more: A. In the past, the inflation rate has always climbed to around 6% following an expansionary monetary policy. B. The Fed publicly announces that the monetary policy will result in a 5% inflation rate. C. People consistently expect a 0% inflation rate. D. Inflation has been around 2% recently, and people have adaptive expectations.

Answer 1

expansionary monetary policy be more effective at pulling an economy out of recession if  People consistently expect a 0% inflation rate. D. Inflation has been around 2% recently, and people have adaptive expectations. in either of the cases a monetary policy will work because according to adaptive expectation hypithesis people will not use all available information and will rely on past experience while predicting the future. so here people will predict inflation to be around 2-3% and hence monetary policy will be able to increase employment and money supply which will help to reduce recession.