Scenario B Would the Fed address the scenario with expansionary or
contractionary policy? Explain.
Reports of price increases for
everyday goods begin to dominate The Fed would address this scenario with contractionary policy.
the news. People are complaining They would do this because it involves raising interest rates to
that their wages and salaries are not fight against inflation and rising prices. This approach would
keeping pace with the cost of living. help stabilize prices.
Most people being interviewed have
jobs, and the national What is a specific monetary action the Fed might use in this
unemployment rate is low. However, scenario? Identify the tool and how the Fed would use it.
many commonly remark that they Explain how this would address the scenario.
are looking for second jobs or jobs
that pay more because basics like A specific monetary action the Fed might use in this scenario
food and clothing cost them so could be to increase the discount rate. By raising the discount
much more than a year ago. rate, borrowing from the Fed becomes way more expensive for
banks. This would also later lead to higher interest rates for
consumers and businesses. But it would reduce demand and
help stabilize rising prices or inflation.
What is a specific fiscal action that Congress might use in this
scenario?
A specific fiscal action that Congress might use in the scenario
could be to reduce government spending. By cutting back on
spending the government decreases demand in the economy,
which can help lower inflation by reducing pressure on prices.
1. Evaluate. Which type of policy, fiscal or monetary, do you think is more effective in today's
U.S. economy? Explain your perspective, referencing an event from within the past 10 years.
Write at least one complete paragraph.
In today’s U.S. economy I think the monetary policy action is more effective. I think this because
the Fed can act more quickly to manage issues like inflation. For example, during the COVID-19
pandemic, the Fed was able to quickly lower interest rates to help keep the economy stable
during this time. These actions helped better than it would’ve with fiscal policy, which may have
taken longer due to political conversations/discussions. The Fed’s ability to quickly change
interest rates and influence spending makes the monetary policy more useful in scenarios such
as this one while fiscal policy is more effective for long term goals and issues.
