Question

The Fed uses monetary policy to affect the supply and demand for money. The monetary policy affects interest rates, aggregate spending and economic growth. Discuss whether the Fed’s policies have the power to prevent recessions. Should the Fed intervene to prevent recessions? please do not plagiarize.

Answer 1

At times the recession may be so low that the Federal government needs to intervene in order to control the same. The fed has the power to control a recession in the following manner.

1: the Federal reserve can boost in the economy by conducting open market operations. This is done by purchasing government securities from banks. The result is that huge amounts of money are provided to banks which can be further loaned out to the customers. Due to increase in the amount of money, there is a downward pressure on the interest rates. Due to lower interest rates consumers demand a greater amount of goods and services which encourages producers to produce more. Hence there is an overall stimulation of the economy.

2: the Federal reserve can also directly reduce the Federal fund rates. This refers to the interest rates that banks charge other banks for lending excess reserves. Due to lower interest rates there is an overall increase in the demand for money which boosts the economy.

3: the Federal reserve requirement can also be lowered resulting in greater cash available with banks for lending out to their customers. Greater supply of money will again put a downward pressure on the interest rates which will stimulate the economy and help to control recession.