Suppose the economy slips into a recession and the Fed takes action to stimulate the economy.
a. What would specifically would the Fed normally do if they took an active approach to monetary policy (don’t base your answer on the most recent recession where the Fed took unusual, extraordinary actions)? What is their goal in taking these actions – which spending category/categories are they trying to influence and how?
b. Suppose the Fed took a monetarist approach, i.e. suppose they believe that the Fed should set growth in the money supply to control long-run inflation. In this case, briefly explain the approach the Fed would likely take in response the recession.