Question

1. Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. True or False:
2. If wage contracts have short duration, it would make the recession induced by contractionary monetary policy more severe. True False
3. If there is little confidence in the Fed's determination to reduce inflation, it would make the recession induced by contractionary monetary policy more severe. True or False
4. If expectations of inflation adjust quickly to actual inflation, a recession induced by contractionary monetary policy will be severe. True or False:

Answer 1

Answer:1 True, 2. True, 3. True, 4.True

Explanation:

monetary policy is the economic policy used by federal reserve or other monetary policy authority known in other countries of the world as central bank to control the supply of money or to mop up the excess liquidity in the economy in order to achieve the objective of controlling inflation in the economy through the use of monetary policy instruments such as open market operation, bank rate, liquidity ratio, the open market operation is used by the central bank want to reduce the lending power of the commercial bank it sells securities to the general public, the people buy with the cheque drawn on their deposit in the commercial banks, the central bank then presents the cheque to the commercial banks and draw on their cash reserves this reduces the cash reserve of commercial banks and therefore reduce their ability to lend. The result will be a decrease in the supply of money in the economy.

Wages is the compensation given to a worker for a services rendered. It is a price paid for Labour. When a wage contract is for a short duration, the wages paid to workers will be low it will not be enough to cover most of their needs, in a period of inflation the value of money is reduced,the money will lose their purchasing power and it will reduce the ability of the money to buy more goods and services, it has an effect on the standard of living of the people.

Recession is defined as the contraction of the business life cycle, during recession business is most affected in terms of finance of business activities. The control of inflation through the use of contractionary monetary policy reduces the supply of money in circulation making it very difficult for businesses to secure the much needed finance for their activities. Therefore, the business organizations must have more confidence in the ability of the central bank to reduce inflation,but when they have little confidence in the determination of the central bank to reduce inflation through the use of contractionary monetary policy it makes the recession caused by the contractionary monetary policy more severe.

Inflation is the increase in the general price level of goods and services in the economy. It is a situation in which money lose their purchasing power, if inflation is not quickly controlled it can lead to the total collapse of the economy of a country. Therefore, a recession caused by contractionary monetary policy will be severe if expectation of inflation adjust quickly to actual inflation.