Question

Suppose in an election year, the economy is benefiting from low unemployment. At the same time, clear signs of Inflationary pressures were apparent. How might the central bank with a primary goal of price stability react? How might members of the incumbent political party who are up for re-election react? In this case, the appropriate monetary policy is to lighten monetary policy, increasing interest rates to curb the emerging inflationary pressures in pursuit of the long-run oal of price stability. In contrast, it is likely that the politicians due for re- election would be more concerned with the low unemployment in the economy and be in favor of a cut in interest rates. In the absence of influence over an independent central bank, they may push for immediate increases in government spending or roductions in taxes,

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Answer 1

All your answers which you have selected in the picture is correct. Explanation of the Answer:
(Answer: Tighten, increasing, a cut, increases, reduction).

Explanation:
When inflation is high it can be controlled by reducing/tightening the money supply in the economy. By increasing the interest rates the money supply can be brought into control because when the interest rates are high the borrowing will it reduce.

The downside of it is that it will slow down the economy. Due to higher borrowing cost, there is less business spending and it creates unemployment.

The present government can get affected in the re-election due to it. There is a higher chance of government coming when there is a boost in the economy.
Boost in the economy can be brought with two tools.
Monetary policy and fiscal policy.

Monetary policy demands lowering of interest to boost the economy, it is in the hand of Central Bank of the country.

Whereas fiscal policy is in the hands of Central Government. It can bring a boost in the economy by increasing government expenditure in development projects.

It can also reduce taxes to increase business activities. As companies tend to expand more in a country, where there is less taxation.