Suppose in an election year, the economy was is benefiting from investor optimism. At the same time, clear signs of inflationary pressures were apparent. How might the central bank with a primary goal of price stability react? How might members of the incumbent political party who are up for reelection react?

In this case, the appropriate monetary policy is to (Click to select) tighten loosen monetary policy, (Click to select) increasing decreasing interest rates to curb the emerging inflationary pressures in pursuit of the long-run goal of price stability. In contrast, it is likely that the politicians due for reelection would be more concerned with the investor optimism in the economy and be in favor of (Click to select) a cut an increase in interest rates. In the absence of influence over an independent central bank, they may push for immediate (Click to select) decreases increases in government spending or (Click to select) reductions increases in taxes.