Suppose the Fed would like to stimulate the economy that is In a state of recession....

Suppose the Fed would like to stimulate the economy that is In a state of recession. Discuss what are the tools that the Fed would use to stimulate the economy and what will be the impact on the different variables such as the GDP, the Investment, Consumption , level of price ect .Show your work using graphical analysis.

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Expert Solution

Federal Reserve will be stimulating the economy in the state of recession in the economy by following manner-

A. Federal Reserve will be doing quantitative easing of the monetary policy in order to stimulate the economy

B. Federal Reserve will also be cutting down on the interest rate because lower interest rate will generate demand in the economy and it will also encourage more lending.

C. Federal Reserve will also be reducing the Reserve requirement of the commercial bank because reduction of The Reserve requirement will mean that the bank will be free to loan more in the market.

D. Federal Reserve can also be conducting the open market operations and they will be buying the securities from the commercial bank so that there will be infusion of liquidity in the system.

E. federal reserve will also be conducting out bailouts for various entities in order to revive them and reduce the financial condition.

Stimulation of the economy will be leading to increase in the gross domestic product and it will also be leading to increase in the investment along with the increase in the consumption level of the prices so it will be leading to generation of the jobs and stability of the economy which will be helping in generation of the demand and revival of the businesses.

jeff jeffy answered 2 years ago

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