Question

(a) Explain the three monetary tools that the U.S. Federal Reserve System or any other central banks can adopt to fight for an economic recession.

(b) Explain three situations when monetary policy is ineffective in fighting for an economic recession.

Answer 1

A):-ther central banks can numerous adopt Monentoery tools to fight for an economic recession.but three main Monentoery tools are

Open Market Operations

Discount Lending

Reserve Requirments

a) :-Reserve requirement is used to change the requirement for all checking, time, or saving accounts in the country

b) :-Open market operations is definited as the buying or selling of securities is financial market, affect the amount of excess reserves in the banking system and the ability for banks to support new loans

c) :-Discount rate is defined as the interest the fed charges on loans to financial institutions, fed wants easy money policy will Lower rate and/or allow more borrowing then before, fed wants tight money policy with discourage borrowing by raising rate

B) :-three situations when monetary policy is ineffective in fighting for an economic recession

a):-Liquidity Trap

A liquidity trap occurs when a period of very low interest rates and a high amount of cash balances held by households and businesses fails to stimulate aggregate demand.

Two aspects of a liquidity trap

1.Risk averse commercial banks

•Required to hold more capital

•Charging a risk premium on new loans especially to business customer

2.Private sector businesses and consumers

•Low on confidence

•Focused on cutting debt rather than taking out new loans

b):- Monetary Neutrality is the idea that money supply does not affect real economic variable

C) :-the currency to deposits ratio used to demonstrates the importance the public places on how they want to hold their monetary assets

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