Question

Scenario 1: The economy is experiencing a 2% increase in the unemployment rate and GDP is falling. 1. Would you need an expansionary or a contractionary monetary policy? Explain. 2. What monetary policies can be used to address this scenario? Explain at least two ways you would use the tools of monetary policy. 3. What are the benefits and opportunity costs of the changes you propose? Consider the impact on economic growth, price stability, and unemployment

Answer 1

Due to the changes in the economy, the policy would be expansionary monteary policy.

The appropriate policies are reducing the reserve ratio and an open market purchase.

The benefits are increase in economic growth and reduction in unemployment.

The opportunity cost is increase in inflation.

What is a monetary policy?

Expansionary monetary policy are policies taken to increase the money supply in an economy. Expansionary monetary policy can be carried out by either reducing the reserve requirement or carrying out an open market purchase.  A danger of expansionary monetary policy is it can increase inflation.