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Concerns about a political business cycle suggest that fiscal and monetary policy should be fully discretionary.
Which two types of fiscal policy are discretionary and explain contractionary monetary policy?
There are two varieties of fiscal policy that are optional. Tax reductions and an increase in government spending are examples of expansionary policy, which is used to boost the economy during recessionary periods. Contractionary policy, the second kind, is employed to cool down a hot economy during an inflationary lull. When a central bank employs its monetary policy tools to combat inflation, that practice is known as contractionary monetary policy. This is how the bank modifies economic expansion. An economy that is running too hot will have inflation. Because it restricts liquidity, it is often referred to as a restrictive monetary policy. The Federal Reserve's three primary methods for reducing the money supply are raising interest rates, raising the minimum reserves required of banks, and selling government securities.
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