NASAA Series 66 Uniform Combined State Law ExaminationEconomic Factors and Business InformationHard
A central bank implements a policy to significantly increase the money supply and lower interest rates to stimulate economic growth. This action would typically occur during which phase of the business cycle?
- AExpansion.
- BInflationary period.
- CTrough.
- DPeak.
Show answer & explanationAnswer & explanation
Correct answer: C. Trough.
Central banks typically implement expansionary monetary policies, such as increasing the money supply and lowering interest rates, during a trough or the early stages of an expansion following a contraction. The goal is to stimulate borrowing, investment, and consumer spending to pull the economy out of a recession and initiate recovery.
Why the other options are wrong
- A. In a robust expansion, monetary policy might be neutral or tightening to manage inflation, not aggressively stimulating.
- B. During an inflationary period, central banks would typically decrease the money supply and raise interest rates to curb inflation, the opposite of the described action.
- D. During a peak, central banks are more likely to tighten monetary policy to prevent overheating and inflation.
Monetary Policy at Trough
At the lowest point of an economic cycle (trough), central banks typically implement expansionary monetary policies to stimulate demand and initiate recovery.
- Actions: Increase money supply, lower interest rates.
- Goal: Encourage borrowing, investment, and spending.
- Aims to move economy from trough into expansion.
Memory trick: Trough Time: Tools for Turnaround.