Carefully explain how monetary policy can be used to counter a recession. Explain what the central bank does as well as how its actions affect the economy. Under what circumstances is fiscal policy especially useful?
To counter a recession, a central bank reduces its interest rate target. To do this it would increase the money supply by buying bonds. The decrease in the interest rate raises investment spending. The increase in investment spending causes aggregate demand to shift to the right raising output. If the central bank decreases the nominal interest rate to zero, it cannot decrease it further. In this case if the economy is still in recession, tax cuts and increases in government spending can be used to increase aggregate demand further.
You might also like to view...
The main losers from inflation are those who
a. have significant assets in real property b. have fixed incomes c. have put their money in foreign banks d. sell products that have a quick turnover e. none of the above
Using the values in the table above, and assuming that the real interest rate equals 4, calculate equilibrium values for consumption, household saving, investment, and net exports. Use these values to confirm that the goods market is in equilibrium
What will be an ideal response?
Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons?
a. Consumer surplus increases. b. Consumer surplus decreases. c. Consumer surplus is not affected by this change in market forces. d. We would have to know whether the demand for lemons is elastic or inelastic to make this determination.
If we consider the equation PAE = A + bY the part that corresponds to the MPC when we make simplifying assumptions is:
A. Y B. PAE C. b D. A