Question

Consider how the economic machine works (as described in the Dalio video).

a) Assume the economy appeared to be slipping into recession and jobs were starting to be lost, what action would you expect the Fed to take?

b) What outcome are they trying to achieve?

c) Assuming their action was not having the desired effect (because we had reached the end of the long-term debt cycle), what steps would need to be taken?

Answer 1

A. If a country is dealing with recession or jobless growth then in such situations the Federal Reserve plays a necessary role. The fed helps to manipulate the unemployment price and steady fee in the economy. the fed in the case of falling economic system might also take corrective steps to minimize the unemployment and also helps the economic device of the us economy. The fed will use the tool of open market operations to deal with recession in the economy. It can lower the interest charges through purchase the debt securities in the open market. This tool will lead to decrease the price of borrowing for the corporations and individuals. Decrease hobby rates also enable customers to make greater purchases on savings maintaining client prices excessive and likewise extend themselves similarly into debt rather than live inside their means. Every other approach to re-inflate the economic system at some point of recession is discount lending which is additionally referred to as discount window. By means of the use of this method fed makes lending of unstable loans at lower hobby rates. It has also rolled out a host of new lending services comparable to bargain lending targeted at supporting specific sectors of the economy or the expenses of particular asset classes

B. These methods are taken to get better the financial system from recession. These methods will assist to dispose of unemployment from the economy. Also the falling output will minimize the actual GDP. Consequently to increase the output of the financial system fed takes the above actions. They are attempting to attain the consequence with low authorities borrowings excessive output less unemployment reduce social troubles reduce in income inequality etc.

C. the long-term debt cycle comes around about as soon as each 50-75 years and occurs due to the fact countless non- permanent cycles add up to regularly greater debt and debt-service burdens which the central banks attempt to greater than neutralize by using reducing hobby rates. the steps to be taken to recover from this situation are:

1. refinance your debt to a decrease interest fee

2. make greater payments on your debt

3. free up cash to put toward debt payment

4. spare cash toward debt payment as viable