Question

Ascertain the impact on price and Quantity Produced (GDP) of The Recession of 2008.

How does the Federal Reserve System use the three tools at its disposal to conduct monetary policy?

How does the FED affect the money supply, and how will such action affect the economy.

How does the government use the two tools (expenditure and taxes) to conduct Fiscal Policy? How does the government affect the Demand, and how will such action affect the economy.

Please describe in as much detail as possible.

Answer 1

In recession real GDP of economy fall short of equilibrium. In this situation, FED needs to take expansionary monetary policy. These will be the open market purchase of government securities, decrease the required reserve ratio and a direct increase of money supply(printing money). As money supply is increased real interest rate will be decreased. People now want to increase their consumption demand. In this way, these policies will help to come back the economy to the equilibrium.

The government uses expansionary fiscal policy includes an increase in government expenditure, decrease in tax to help the economy get out of recession. Increase in government expenditure helps to increase aggregate demand which would increase the real GDP. The decrease in tax increases the disposable income. So the aggregate demand would increase with high income and real GDP will be increased.  

When real GDP is increased, demand for the employee will be increased. It helps to decrease unemployment and the economy will be out of recession.