Which of the following is the monetary policy reaction when a weaker GDP is expected?
A)When government policymakers expect a weaker GDP, they proactively increase government expenditure to boost GDP.
B)When the Federal Reserve expects a weaker GDP, it will proactively decrease interest rates to boost GDP.
C)When the Federal Reserve expects a weaker GDP, it will proactively increase interest rates to boost GDP.
D)When government expenditure rises, then GDP will also rise.

Question

Quizplus · Accepted Answer

When the Federal Reserve expects a weaker GDP, it will proactively decrease interest rates to boost GDP. By decreasing interest rates, it becomes cheaper for businesses and consumers to borrow money, leading to increased spending and investment, which increases GDP. Increasing interest rates would have the opposite effect, potentially slowing down economic growth. Option A is incorrect because increasing government expenditure is a fiscal policy reaction rather than a monetary policy reaction. Option C is incorrect because it suggests the opposite of what the Federal Reserve would do to boost GDP. Option D is incorrect because although there is a positive correlation between government expenditure and GDP, it is not a monetary policy reaction specifically.

Which of the Following Is the Monetary Policy Reaction When