Question

What are the two main policy goals of the Federal Reserve and for which policy goal is contractionary monetary policy best used?

Answer 1

Two main policy goals of the Federal Reserve (also knows as dual mandate) are -

1. Maximum sustainable employment - It means the level of employment that is likely be in normal economic conditions when there's neither a boom nor a recession.

2. Price stability. - The Federal Reserve has mandate to maintain price stability target near 2 % inflation rate in the economy.

The Fed will use contractionary monetary policy when its second goal "Price stability" moves above the 2% target. The Fed will increase the interest rate  "Federal Fund rate" to bring down the level of inflation in the economy and bring it back near the Fed symmetric 2 percent objective.