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If the economy is at point A in the graph above, the Federal Reserve's appropriate monetary policy would be to cut interest rates.
Which monetary policy is employed to reduce interest rates?
Expansionary monetary policy works by rapidly increasing the money supply or lowering short-term interest rates. In theory, expansionary monetary policy should result in increased economic growth and decreased unemployment. It will also result in higher inflation. It is implemented by central banks through open market operations, reserve requirements, and interest rate setting. Central banks utilize expansionary monetary policy to revive a weakening economy and GDP. The Federal Reserve employs three techniques of expansionary monetary policy: interest rate cuts, reductions in bank reserve requirements, and quantitative easing.
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