Question

1.What are the government's fiscal policy options for ending a severe recession?

2. What are the short term and long term consequences of using fiscal policy for ending a server recession/

3. What are 3 Monetary Policy tools the Federal Reserve Board uses?

4. What is the Federal FunWds Rate?

Answer 1

1. Government's fiscal policy includes policies related to government spending and taxation. When there is recession in the economy government uses fiscal policy to increase money supply through either increase in government spending or reduction in taxes. When taxes reduced then people have more disposable income which increases consumption of goods and reduces recession. Similarly increase in government spending increases money money and combat recession.

3. 3 Monetary policy tools used by the Federal Reserve:

1. Bank rate: The bank rate is the rate at which the central bank gives credit to the commercial banks. The increase or decrease in the bank rate is often followed by increase or decrease in the market rate of interest. Accordingly, the cost of credit changes the market. During inflation, the cost of capital is increased by increasing the bank rate. This reduces the flow of credit, as desired. On the other hand, during deflation, the cost of capital is reduced by reducing the bank rate. This increases the flow of credit.

2. Open market operation: Open market operation is the sale and purchase of government securities in the open market by the central bank. By selling the securities, the central bank withdraws cash balances from the economy. And, by buying the securities, the central bank adds to cash balances in the economy. During inflation, central bank sells government securities and reduce the money supply and on the other hand, during deflation, central bank buy government securities.

3. Cash reserve ratio: It refers to the minimum percentage of a bank's total deposits required to be kept with the central bank. Commercial banks have to keep with the central bank a certain percentage of their deposits in the form of cash reserves as a matter of law. When the flow of credit is to be increased, minimum reserve ratio is reduced and vice-versa.

4. Federal funds rate is the rate at which depository institutions lend their reserve balances to other institutions for overnight period. These despository institutions includes banks, credit unions etc.