A. Fiscal policy is concerned with taxation, subsidies and government spending; monetary policy, in contrast, is concerned with interest rates, the money supply and bank lending.
B. As the money supply is an important influence on aggregate demand such a contraction of money supply would exacerbate the severity of the recession.
C. This reduced incentive to hold excess reserves in prosperous times means that during an economic boom, the behavior of profit-oriented banks is likely to make the money supply expand, adding undesirable momentum to the booming economy and paving the way for a burst of inflation.
D. These objectives are sometimes extremely difficult to achieve.
E. When this occurs, the prosperity of banks to hold excess reserves will turn the money creation process into one of the money destruction.
F. For many years the main emphasis was on employment and balance of payments, but this adversely affected the pursuit of stable prices and economic growth.
G. When adopting monetary policy, the central bank usually takes action to change the equilibrium of the money market, that is, to alter the money supply, move the interest rate, or do both.