It is correct to state that the Fed will address the scenario with expansionary policy.
<h3>
What is an expansionary policy?</h3>
An expansionary policy is one that seeks to increase the amount of money so that aggregate demand can be stimulated.
<h3>What is a specific monetary action the Fed might use in this scenario? Identify the tool and how the Fed would use it. Explain how this would address the scenario.</h3>
When money is injected into the economy using tools such as
- Lower interest rates
- Lower Bank Reserves etc., demand is stimulated.
<h3>What is a specific fiscal action that Congress might use in this scenario?</h3>
Examples of fiscal polices that the congress might enlist for deployment in this scenarios are:
- Government spending; and
- Tax regulation.
To increase aggregate demand, Government will inject more money in to the economy by buying back bonds or embarking on projects at the state and local levels.
Reduction of taxes will also help put more money in the hands of people, thus increasing aggregate demand.
Learn more about expansionary policies:
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