Suppose the economy slips into a recession and the Fed takes action to stimulate

Question

Suppose the economy slips into a recession and the Fed takes action to stimulate the economy.

a. What would specifically would the Fed normally do if they took an active approach to monetary policy (don’t base your answer on the most recent recession where the Fed took unusual, extraordinary actions)? What is their goal in taking these actions – which spending category/categories are they trying to influence and how?

b. Suppose the Fed took a monetarist approach, i.e. suppose they believe that the Fed should set growth in the money supply to control long-run inflation. In this case, briefly explain the approach the Fed would likely take in response the recession.

Explanation / Answer

(a) The Federal Reserve would take part in an active approach to monetary policy by reducing the rate of interests of financial institution. It would give rise to more participation of loan takers. The supply and demand of the product would tend to increase. It would cause the increase in wages of labour.

The goal in taking the action is to increase the economy of the nation. It is influenced by the market supply.

(b) The response of the Federal Reserve is that the money supply is controlled for a long-run inflation by increase in the business and trade across the world. It is depicted by an increased rate of exports in the market.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.