Suppose you have just been appointed to the Federal Open Market Committee of the Federal Reserve. Your advisors report that the economy is growing slowly. Real GDP is at an annual growth rate of 0.01%. Unemployment is rising rapidly; production is down; and investors are not investing.
a. What "open market operations" would you suggest in this case?
b. What other monetary policy may be called for in this case?
c. Describe the effect each policy has on the commercial banking system.?
d. Describe the effect each policy has on the national income. Why is this effect desirable in this case??
e. Describe one automatic stabilizer (or built-in stabilizer) that may prevent the economy from moving too quickly. How does this stabilizer work?