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4. What major monetary policy weapons are available to the Federal Reserve Board in cases of...

4. What major monetary policy weapons are available to the Federal Reserve Board in cases of recession? Discuss. What action can the Federal Reserve take if the economy is close to full employment and is in a period of high inflation? Discuss.

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Answer #1

Monetary Policy is used by Federal Reserve. Following are tools of Federal Reserve:

  • Open Market Operation.
  • Reserve Requirement.
  • Discount Rate.
  • Federal Fund Rate.

During the recession, Federal Bank will go with expansionary monetary policy. Fed will buy securities from open market . Further, reserve requirements will be slashed. These measures will collectively shift aggregate demand to right.

But as economy reaches full employment level. contractionary monetary policy must be followed by the Federal Reserve. Fed will sell government securities in open market. Further, reserve requirements will be increased. these actions will help to fight against the inflation.

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