Section 2: Monetary Policy and the Recessionary Gap Assume the US. economy is in a recession operating below potential output (the real GDP) and the...
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Section 2: Monetary Policy and the Recessionary Gap Assume the US. economy is in a recession operating below potential output (the real GDP) and theFederal Reserve System takes appropriate monetary policy actions to close the recessionary gap(see Figure 5). Anchored in this essential statement, answer the following questions on how themonetary policy tools are used to deal with the recessionary gaps. Figure 5 LRASSRASRecessio naryGapADu DU a) What is the type of monetary policy the Federal Reserve System utilizes in an attempt to close therecessionary gap? b) What are the instruments of monetary policy that the Federal Reserve System uses to close therecessionary gap? Explain. c) How does management of its money supply enable the Federal Reserve to manage the economyin order to reduce recessionary pressure?
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