When the Fed purchases additional securities and shifts to a more expansionary monetary policy,
A) the inflation rate will rise almost immediately.
B) the growth of output and employment will increase quickly.
C) several months will typically pass before the shift in policy exerts much impact on output and employment.
D) this policy will eventually lead to a decline in the general level of prices if it is continued for a prolonged period of time.

Question

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,
A) the inflation rate will rise almost immediately.
B) the growth of output and employment will increase quickly.
C) several months will typically pass before the shift in policy exerts much impact on output and employment.
D) this policy will eventually lead to a decline in the general level  of prices if it is continued for a prolonged period of time.

Quizplus · Accepted Answer

Several months will typically pass before the shift in policy exerts much impact on output and employment. While the expansionary policy can lead to an increase in the money supply and lower interest rates, it takes time for businesses and consumers to respond to these changes and increase their spending and investment. Therefore, the impact on output and employment is not immediate. Option A is incorrect because an increase in the inflation rate is not an immediate consequence of an expansionary policy. Option B is incorrect because, as previously mentioned, it takes time for the impact on output and employment to become apparent. Option D is incorrect because an expansionary policy is more likely to lead to an increase in prices, not a decline in prices.

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