Answer to Question #149798 in Economics of Enterprise for felix

Question

6. Describe how monetary policy can be used to control the business cycle.

By ___________ interest rates and ____________ the lending of money, a government can make it more expensive to borrow money. It can also ________ the supply of investment capital by restricting the amount of money available for loans. These both tend to _________ growth, since producers often need to borrow money to expand production. This makes it less likely that a _______ will turn into a recession. The opposite approach — __________ interest rates and freeing up investment capital — leads to an expansion of supply, _________ the economy's rate of growth, which can produce a recovery.

Answer 1

By increasing interest rates and reducing the lending of money, a government can make it more expensive to borrow money. It can also lower the supply of investment capital by restricting the amount of money available for loans. These both tend to slower growth, since producers often need to borrow money to expand production. This makes it less likely that a debt will turn into a recession. The opposite approach lowering interest rates and freeing up investment capital — leads to an expansion of supply, increase the economy's rate of growth, which can produce a recovery.