The Great Depression illustrates that monetary policy is
A) effective against inflation but incapable of dealing with a decline in output.
B) a source of economic instability if utilized inappropriately.
C) incapable of reversing an economic downturn when the money supply is increasing at a constant rate.
D) incapable of reversing a major downturn unless the recession stems from inflation.

Question

Quizplus · Accepted Answer

The Great Depression was a clear illustration that monetary policy can cause economic instability if it is not used appropriately. Monetary policy during the 1920s was too loose, resulting in an unsustainable boom, and then inappropriately tight during the early 1930s, exacerbating the economic downturn. Therefore, option B is the best answer.

The Great Depression Illustrates That Monetary Policy Is