If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make? The Federal Reserve uses discount rate, reserve requirements and open market operations to fight recession. In order to fight recession, the Federal Reserve must stimulate economic growth. To stimulate economic growth, the Federal Reserve must buy bonds into the open market, decrease the reserve ratio to increase the funds available for loan, and/or decrease the discount rate.
All of these increase the money supply which in turn decreases interest rates. The law of supply and demand will cause the value of money to be less because of the abundance of money. People tend to borrow money or withdraw money from their bank deposits because of the lower money value when stored. Lower interest rate induces more spending among the people. The increase in investment spending would mean an increase in the economic growth.
More money spent for investment and as more products or output are produced per unit of money means higher gross domestic product. This in turn means recession becomes less and less. What changes, if any, to the current condition of these tools would you make at the next meeting of the Federal Reserve? Explain why and the benefits/drawbacks of this strategy. Looking at the present economic conditions, we need additional stimulation in our economic growth. This would mean that we need to increase money supply by some factor.
The best strategy would be to control the reserve ratio and discount rate which is the easiest way to manipulate the amount of money supply. The intent is so that money supply will increase. The increase in money supply as earlier explained stimulates economic growth. Care must also be taken so that the increase in money supply will not be too much that it would cause inflation. Inflation would cause an intolerable decrease in the value of money without getting sufficient increase in the economic growth. References
McConnell, C. (2005). Monetary Policy. Economics: Principles, and Policies, 16/e.. Retrieved March 23, 2007 from http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter15/interactive_graphs. html# Unknown (2007). The Discount Rate. Federal Reserve Board. Retrieved September 12, 2007 from http://www. federalreserve. gov/monetarypolicy/discountrate. htm Unknown (2007). Reserve Requirements. Federal Reserve Board. Retrieved September 12, 2007 from http://www. federalreserve. gov/monetarypolicy/reservereq. htm