Why would policymakers target a reduction in GDP growth by using contractionary policies?
i.The Fed fights inflation by increasing interest rates,which in turn causes a reduction in employment as a by-product.
ii.Excessive optimistic sentiments about the economy can result in an unsustainable economic expansion.
A) i) and ii) are both true
B) i) and ii) are both false
C) i) is true and ii) is false
D) i) is false and ii) is true

Question

Quizplus · Accepted Answer

i) The Federal Reserve (or the Fed) may indeed use contractionary policies, such as increasing interest rates, to combat inflation. This can lead to reduced spending and investment, potentially causing a slowdown in economic growth and an increase in unemployment as a side effect. ii) Overly optimistic sentiments can lead to overheating of the economy, where demand outpaces supply, causing inflation and potentially leading to unsustainable economic conditions. In such cases, policymakers might aim to cool down the economy to prevent a hard landing.

Why Would Policymakers Target a Reduction in GDP Growth by Using