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)The centeral bank may adopt a lot of monetory tools as a part of monetory tools in order to overcome recession

1)open market operations-centeral bank may sell and buy the government securities in the open market especially during recession in order to increase money supply in the economy it buys government bonds and give the money to society.2)the discount rate serves as an important indicator of the condition of credit in an economy .when centeral bank lowers the discount rate this increases excess reserves in commercial banks throughout the economy and expands the money supply 3)reserve ratio-when the federal reserve decreases the reserve ratio,it lowers the amount of cash that banks are required to hold in reserves ,allowing them to make more loans to consumers and it increases money supply b)high currency deposit ratio-the banking habit among large proportion of vast rural segments is still weak which has kept the curremcy deposit ratio high 2)liquidity trap-it is a situation in which after the rate of intrest has fallen to a certain level almost everyone prefers holding cash rather than holding a debt 3)neutrality of money-monetory policy  is ineffective in the long run and only leads to a change in prices called neutrality of money.so it hard to affect domestic interest rates