Monetary policy is said to be accommodating when
A)the central bank undertakes open market sales to fight inflation
B)the central bank responds to a tax increase by increasing money supply
C)the central bank responds to fiscal expansion by undertaking open market sales
D)in the course of fiscal expansion, the central bank increases money supply to prevent interest rates from rising
E)the central bank does not interfere in any way when the government undertakes fiscal policy

Question

Quizplus · Accepted Answer

Accommodating monetary policy aims to support or accommodate expansionary fiscal policy. One way to achieve this is by increasing the money supply to prevent interest rates from rising during fiscal expansion. Option A is incorrect because open market sales are usually used to reduce money supply and fight inflation. Option B is incorrect because responding to a tax increase with an increase in money supply could lead to inflationary pressures. Option C is incorrect because open market sales are usually used to reduce money supply, which would work against fiscal expansion. Option E is incorrect because the central bank should coordinate with the government to ensure economic stability, rather than not interfering in any way.

Monetary Policy Is Said to Be Accommodating When