Business and Consumer Expectations Concerning Monetary Policy
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Explain why business and consumer expectations about the economy are more important when the Fed uses expansionary monetary policy then contractionary monetary policy. Be specific by explaining how monetary policy works to either increase or decreases GDP.
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Solution Summary
Monetary policies exist to protect the economy from either recession or depression. These must be properly internalized by the business and consumer sectors to avoid any unwanted expectation that will negatively impact the economy.
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Expansionary monetary policy:
Expansionary monetary policy is aimed towards increasing the supply of money in circulation. This could be in the form of hike in public expenditure, tax reduction, buying of government bonds, and cut in interest rates.
The purpose of this policy aims to encourage investments and entrepreneurship thereby creating goods and services, and jobs. This will increase the GDP.
Furthermore, it will boost business and consumer confidence in the economy.
Contractionary monetary policy:
As the economy grows and prospers, it overheats. This ...
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