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Monetary policy implementation

(1) Suppose an economy is going through a Recession -what type of Monetary Policy needs to be implemented by the Federal Reserve? How do we define Monetary Policy?

(2) What is the History of the Federal Reserve system and what are the THREE tools the FED has at its disposal to manipulate or change the Money Supply and interest rates?

Please provide 250 to 300 word response for each and cite references

Solution Preview

During recessions expansionary monetary policy should be implemented. This is also called "loosening the money supply." There is a lack of demand for goods and services, which causes a feedback effect throughout the economy. Firms hire fewer workers which means demand declines further. To reverse this process, the Fed needs to encourage consumers and businesses to spend money. This involves lowering interest rates and expanding the money supply. To accomplish this the Fed buys bonds on the open market and lowers the discount rate. Buying bonds increases the money supply when banks exchange treasuries for cash. The banks then have additional funds, which causes interest rates to fall. The Fed also affects interest rates by lowering the discount rate. This reduces the interest rate member banks must pay to borrow from the Fed, banks become more willing to borrow, to make money available for loans at lower interest rates. Consumers and firms are more willing to borrow and spend when interest rates are low, increasing aggregate demand. If the recession is ...

Solution Summary

History of the Federal reserve and how it controls the economy.