each question 75 words
1. When the economy is in a recessionary mode, aggregate demand shifting inward is often the culprit. Deflationary pressures on prices ensue, and output falls, causing problems like higher unemployment and contraction of the economy.
When the economy is in a recessionary mode, what will likely be the actions by government using fiscal policy? Is it better to concentrate on aggregate demand or aggregate supply? Why?
Review how and why aggregate demand and aggregate supply shift inward and outward. English economist John Maynard Keynes developed a model that provides an explanation for the high and prolonged rate of unemployment of the Great Depression. According to Keynes, what are the major sources of economic instability? Fiscal policy is spending and taxation of the executive branch of the federal government; in recessionary times, what initiatives in spending and/or taxation are going to help the economy?
2. The Federal Reserve System was established to provide a stable monetary system for the entire economy. The Federal Reserve Bank (the Fed) has three major tools to control the money supply: 1) reserve requirements, 2) discount window for loans to member banks, and 3) open market operations.
When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy? Suppose the Federal Reserve purchases a $100,000 bond from John Doe, who deposits the proceeds in the Manufacturer’s National Bank; what will be the impact of this transaction on the supply of money?
How do each of the Fed’s tools work? What is the fractional reserve system, and how does it work in relation to the Fed? Review the Federal Reserve System and how the Fed alters the monetary base to achieve the levels of money supply in the economy.