If the Fed believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. C. use a contractionary monetary policy to lower the interest rate and shift AD to the left. D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

Question

Moocher

Business

15 June, 16:24

If the Fed believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. C. use a contractionary monetary policy to lower the interest rate and shift AD to the left. D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

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Jaxon Andrews · Answer 1

D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

Explanation:

Recession occurs when people do not have money to buy, and that the demand accordingly of each goods falls below.

This clearly reduces money in market as the chain of sale and purchase is low.

To come out of this situation, the Federal Bank, that is central bank responsible for making policies for economy of the country shall take steps.

In this situation the Fed shall reduce the interest rates on borrowings which will attract people to borrow and then there will be money in the hands of people.

Further as people will have the buying power the demand for goods will also increase accordingly the Aggregate Demand curve will also move to right.