What will the Fed do in case of recession?
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Suppose the economy slips into a recession and the Fed takes action to stimulate the economy.
a. What would specifically would the Fed normally do if they took an active approach to monetary policy (don't base your answer on the most recent recession where the Fed took unusual, extraordinary actions)? What is their goal in taking these actions which spending category/categories are they trying to influence and how?
b. Suppose the Fed took a monetarist approach, i.e. suppose they believe that the Fed should set growth in the money supply to control long-run inflation. In this case, briefly explain the approach the Fed would likely take in response to the recession.
Inflation has traditionally been a concern of the Federal Reserve. Recently, there has been the possibility of deflation. Should the Fed be concerned with deflation of prices? What about targeting 'nominal GDP'? Can deflation occur without recession? Can deflation be beneficial? Will deflation worsen a recession or shorten it? Should the Federal Reserve do anything to prevent deflation? What policies do you recommend the Fed follow?
If the economy is facing rising levels of inflation, what would the Fed do with its three monetary control tools? Why does the Fed buy government securities during a recession?