Question

1.Describe how the Federal Reserve can use it's monetary policy tools (FOMC, Discount Rate, Federal Funds Rate) to help reduce the effects of a recession.

Which one of the tools is used most often and why?

I need full explanation for my answers.

Answer 1

Answer- To reduce the effect of recession in the economy , fed will have to use the expansionary monetary policy . The FOMC will have to buy the government securities from the open market so as to increase the lending in economy by increasing the supply of money. The lowering of discount rates and the federal funds rate will enable the banks to borrow at cheaper rates from fed and other banks. Thus , the process of lending will increase with reduced interest rates leading to the rise in the supply of money in economy. This will increase the value of AD by increasing consumption and investment and thus take the economy out of recession.