Of the following, which are actions most closely associated with countercyclical monetary policy?Select the two correct answers below. Select all that apply:During an economic boom, interest rates should be kept high.When the economy slows down, the federal reserve should buy financial assets from commercial banks.During an economic boom, the supply of loanable funds should be increased.During an economic recession, the interest rate should should be increased.FEEDBAC
Question
Of the following, which are actions most closely associated with countercyclical monetary policy?Select the two correct answers below. Select all that apply:During an economic boom, interest rates should be kept high.When the economy slows down, the federal reserve should buy financial assets from commercial banks.During an economic boom, the supply of loanable funds should be increased.During an economic recession, the interest rate should should be increased.FEEDBAC
Solution
The two actions most closely associated with countercyclical monetary policy are:
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During an economic boom, interest rates should be kept high. This is because during a boom, the economy is growing at a rate that may be faster than sustainable, leading to inflation. By raising interest rates, the Federal Reserve (or central bank) can slow down borrowing and investment, cooling off the economy to prevent it from overheating.
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When the economy slows down, the Federal Reserve should buy financial assets from commercial banks. This is known as quantitative easing, a monetary policy whereby a central bank buys government bonds or other financial assets to inject money into the economy. This increases the money supply, lowers interest rates, and encourages businesses and individuals to borrow and spend, which can help stimulate a sluggish economy.
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