The result of all the above is a “Great Recession.” Under a recession, output and incomes decrease, and unemployment increases. The Federal Reserve’s states that it must pursue objectives of full employment and price stability. When unemployment becomes problematic should the Federal Reserve conduct expansionary or contractionary monetary policy
The result of all the above is a “Great Recession.” Under a recession, output and incomes decrease, and
Monetary Policy involves the steps taken by Fed in order to control the money supply and rate of inflation in the economy. Monetary Policy adopted by Fed can be Expansionary Monetary Policy or Contractionary Monetary Policy depending upon the economic conditions.
Expansionary Monetary Policy
The main purpose of expansionary monetary policy is used to counteract the effect of recession and unemployment. It aims at returning the economy to full employment level. It involves decreasing the interest rates, increasing money supply and thus boosting investment and output.
Contractionary Monetary Policy
Contarctionary Monetary Policy is the opposite of Expansionary Monetary Policy. It aims at reducing the level of inflation and generating full level of employment. It involves increasing the interest rates, which makes investment expensive. As a result the money supply in the economy reduces and thus both investment and output decreases.
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