When the economy is in a recession,how can monetary policy affect real output?
A)An expansionary monetary policy can potentially result in increased real output in both the short run and long run.
B)A contractionary monetary policy can potentially result in increased real output in both the short run and long run.
C)A contractionary monetary policy can potentially result in increased real output, but only in the short run.
D)An expansionary monetary policy can potentially result in increased real output, but only in the short run.

Question

Quizplus · Accepted Answer

An expansionary monetary policy, which involves lowering interest rates and increasing the money supply, can potentially stimulate spending and investment in the short run, leading to increases in real output. In the long run, however, the effectiveness of monetary policy is uncertain and depends on various factors, such as the degree of price stickiness and the response of expectations and inflation. A contractionary monetary policy, which involves raising interest rates and decreasing the money supply, can potentially reduce inflationary pressures and improve confidence in the economy, but may also dampen demand and output in the short run.

When the Economy Is in a Recession,how Can Monetary Policy