When experiencing a recession caused by decreased aggregate demand what is the best action the Fed could take to close contractionary gap?
In general, the most important tool that the Fed has at its disposal is open market operations. This tool is the most important because it can be used on a day-to-day basis and to make fine adjustments to the money supply. This makes it the most useful in ordinary circumstances.
However, in the case of a recession caused by a drop in aggregate demand, the Fed’s ability to change interest rates can be...
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