When the Fed uses its policy tools to smooth out the business cycle, the policy is referred to as a(n)

Question

Quizplus · Accepted Answer

Stabilization policy refers to the use of monetary or fiscal policies by the government to reduce the fluctuations in economic growth and dampen the effects of the business cycle. The Federal Reserve, as the central bank of the United States, employs various policy tools to stabilize the economy, such as adjusting interest rates, changing the reserve requirement, and conducting open market operations. Therefore, choice A, stabilization policy, is the most appropriate term for the Fed's efforts to smooth out the business cycle. The other options, Pareto-efficient policy, contractionary policy, and expansionary policy, do not accurately describe the Fed's role in stabilizing the economy.

When the Fed Uses Its Policy Tools to Smooth Out