Question

Congratulations! You have been appointed an economic policy adviser to the U.S. You are told that the economy is significantly underutilizing its available resources and that the following will happen the next year: World recession will continue and the prices of oil will increase significantly. After these two events, the adequate monetary policy would be:

Multiple Choice

• Contractionary MP: Fed buys government securities to the banking sector→ ↑MS → ↑Banks reserves → ↑available loans → ↓i → ↑C,I → shift the AD to the right → ↑ GDP.
  

• Contractionary FP: Fed sells bonds government securities to the banking sector → ↓ MS → ↓banks reserves → ↓available loans → ↑i → ↓C,I → shift the AD to the left → ↓GDP

• Expansionary MP: Fed buys government securities to the banking sector → ↑MS → ↑Banks reserves → ↑available loans → ↓i → ↑C,I → shift the AD to the right → ↑ GDP.

• Expansionary MP: Fed buys government securities to the banking sector→ ↑MS → ↑Banks reserves → ↑available loans → ↑i → ↑C,I → shift the AD to the left → ↑ GDP.
  

Answer 1

Expansionary MP: Fed buys government securities to the banking sector→ ↑MS → ↑Banks reserves → ↑available loans → ↑i → ↑C,I → shift the AD to the left → ↑ GDP.
Since there will be recession and the GDP would be low, Fed will increase the money supply to increase consumption.