The Federal Reserve Board has decided to ease monetary conditions to counter early signs of an economic downturn. Because price inflation has been a burden in recent years, the Board is eager to avoid any action that the public might interpret as a return to inflationary conditions.How might the Board use its various powers to accomplish the objective of monetary ease without drawing unfavorable publicity to its actions?
The Federal Reserve wants to ease monetary policy to stimulate economic activity without causing public alarm over rising inflation. If it lowers the discount rate, banks will probably lower rates and the public could see this as potentially inflationary. However, if the Fed lowers reserve requirements, banks will have more funds to inject back into the economy. The Fed also could use the FOMC to inject funds into the economy.
According to the Federal Reserve website,
"Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates—the three economic goals the Congress has instructed the Federal Reserve to pursue."
In this question, the Federal Reserve, or Fed, wants to enact a loose monetary policy to stimulate economic activity. Because price inflation has been a burden in recent years, however, the Federal Reserve Board wants to avoid any action that the public might interpret as a return to inflationary conditions. Therefore, it can use one of its three primary tools of monetary policy to...
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