(b) Discuss how the Federal Reserve might fight an economic recession in the United States. In your discussion, indicate the monetary policy tools to be used, how each tool would be used, and how the Fed's actions (utilized tools) would affect specific key economic factors to achieve the ultimate goals.
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
To fight a recession the FED would use an expansionary-monetary policy also known as monetary easing, where in with the use of tools at the disposal under monetary policy the government seeks to provide impetus to raise the consumption and demand.
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