Question

Suppose the European Central Bank (ECB) decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would the ECB expand, contract, or not change the European money supply?

Answer 1

Answer:

the European Central Bank (ECB) should engage in a contractionary monetary policy

Explanation:

A contractionary monetary policy takes place when a central bank (or the Fed) reduces the money supply in order to cool down the economy, lower inflation rate or like in this case, wants to offset expansionary fiscal policy.

The central bank initially raises the interest rates and starts selling more securities in order to absorb cash from the markets.