What policy action by the Federal Reserve contributed to the 1960s recession?

What policy action by the Federal Reserve contributed to the 1960s recession?

• A. Tight monetary policy
• B. Loose monetary policy
• C. Quantitative easing
• D. Zero interest rate policy

Answer: (A)

Tight monetary policy slows economic activity by pulling liquidity out of the system and raising borrowing costs. When the Federal Reserve tightens, it usually raises interest rates and reduces the money supply, making loans more expensive and dampening spending by consumers and investment by businesses. If this restraint is enough to curb inflation and demand, the economy can slip into a recession. In the 1960s, the Fed tightened to control rising inflation, and that restraint helped contribute to the downturn of 1969–70. Lozier or looser policy would have stimulated activity rather than restrain it, and tools like quantitative easing or a zero interest rate policy were not part of that era.

Tight monetary policy slows economic activity by pulling liquidity out of the system and raising borrowing costs. When the Federal Reserve tightens, it usually raises interest rates and reduces the money supply, making loans more expensive and dampening spending by consumers and investment by businesses. If this restraint is enough to curb inflation and demand, the economy can slip into a recession. In the 1960s, the Fed tightened to control rising inflation, and that restraint helped contribute to the downturn of 1969–70. Lozier or looser policy would have stimulated activity rather than restrain it, and tools like quantitative easing or a zero interest rate policy were not part of that era.