ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the economy is in recessionary gap, the Fed will adopt expansionary monetary policy to increase money supply in the market by buying securities, lowering the reserve rate, and/or decreasing the discount rate.

Detailed explanation-2: -The three key actions by the Fed to expand the economy include a decreased discount rate, buying government securities, and a lowered reserve ratio.

Detailed explanation-3: -The Fed has several monetary policy tools it can use to fight off a recession. It can lower interest rates to spark demand and increase the amount of money in circulation via open market operations (OMO), including quantitative easing (QE), through which additional types of assets may be purchased by the Fed.

Detailed explanation-4: -Expansionary fiscal policy can close recessionary gaps (using either decreased taxes or increased spending) and contractionary fiscal policy can close inflationary gaps (using either increased taxes or decreased spending).

Detailed explanation-5: -During a recession, he explains, the longstanding consensus has been to rely on monetary policy by lowering interest rates. Once that approach stops working, there’s typically a switch to fiscal policy, such as issuing stimulus checks. As he points out, once rates get too low, they can’t be cut any further.