What actions should the Fed take if it believes the economy is about to fall int
ID: 1130381 • Letter: W
Question
What actions should the Fed take if it believes the economy is about to fall into recession? Include in your answer 1) intended impact of monetary action on money supply and interest rates and 2) exact actions the Fed could take to implement the policy&
What is fiscal policy, and who is responsible for fiscal policy? Describe corrective fiscal policy that could be taken if faced with a recession, and how the action would affect the Federal budget deficit. What actions should the Fed take if it believes the economy is about to fall into recession? Include in your answer 1) intended impact of monetary action on money supply and interest rates and 2) exact actions the Fed could take to implement the policy
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What is fiscal policy, and who is responsible for fiscal policy? Describe corrective fiscal policy that could be taken if faced with a recession, and how the action would affect the Federal budget deficit.
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What is fiscal policy, and who is responsible for fiscal policy? Describe corrective fiscal policy that could be taken if faced with a recession, and how the action would affect the Federal budget deficit.
Explanation / Answer
a) A Fed will choose to follow an easy money policy if they anticipate that the economy is going down into a recession. A recession or lack of demand can be corrected by increasing the money supply in the economy thereby giving extra money in the hand of people and allowing them to make more demand and taking the economy out of recession.
An easy money policy by the Fed will increase the money supply in the economy and bring the interest rates down. For example, at the time of subprime crisis, the Fed used near-zero interest rates to increase the money supply.
Fed can use Open Market Operations to increase the money supply (buying the Federal bonds from the public and giving them money in return) or they can decrease the discount rates allowing the banks to borrow more at lower rates.
b) Fiscal policy can be defined as the government action to influence the level of the economy by adjusting its expenditure level and tax rates in the country.
In case of recession, Government can increase its expenditure and reduce the taxes, both the action of the government will increase the disposable income in hand of people and increase demand. The action to use lower taxes and higher expenditure will increase the fiscal deficit of the government.
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