BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by slowing rates of money supply growth. However, money supply growth tends to begin growing again before the onset of recession.

Detailed explanation-2: -Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.

Detailed explanation-3: -8 Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. At the same time, it greatly expands the central bank’s balance sheet.

Detailed explanation-4: -When the Fed predicts that the economy is moving toward a recession, it can boost economic activity in the short run by making borrowing less costly for the banks through a decrease in the federal funds rate.