Question

Discussion Board Post:

How can the Federal Reserve Bank intervention stimulate the U.S. economy?

Answer 1

The Federal Reserve Bank can use monetary policy to stimulate the economy. There are three main tools the Federal Reserve Bank uses to increase or decrease the money supply in the market which stimulates the demand in the economy. These tools are:

• Open market operations
• Reserve rates
• Lending rates for the banks.

These three tools are used to manage the money supply in the market. If the demand is low then the Fed will look to increase the money supply in the market by buying bonds, reducing the lending rates or reducing the reserve requirements in the banks. These actions will release extra money in the hand of people and they will tend to demand more. We call it easy money policy.

If the demand in the economy is less, Fed does just the opposite they sell bonds in the market increase the lending rates and raise the reserve requirements. Doing so reduces the money in the hand of people and they demand less.

An easy money policy also allows the business to invest more at lower interest rates and increase the demand in the economy. A dear money policy does just the opposite.

Conclusion: The FED increase or decrease the money supply in the market to increase or decrease the interest rates in the economy. Thereby stimulating demand and output.