Question

Explain very briefly, what kind of monetary policy can be used to fight against recession and depression.

Answer 1

Recession and depression are cases where real GDP is less than its potential GDP and the rate of growth of GDP is very slow (or even negative). the required amount of increase in the aggregate demand can be brought about by increasing the money supply. This indicates that monetary expansion is the required policy in which the central bank should increase the money supply in the economy. This can be done by different monetary policy tools including the reduction in reserve requirements, discount rate, conducting open market purchase of government securities and a relatively less orthodox method called quantitative easing.