If the U.S. economy enters a new financial crisis, the government may use monetary policy tools to avert a financial meltdown. The government may utilize monetary policy tools to avert a financial collapse if the U.S. economy experiences another financial crisis. First, the Federal Reserve should operate as a lender of last resort and make loans to banks and financial institutions to meet their short-term obligations. When the risk of a financial collapse has receded, the government should revert to its traditional expansionary monetary policy. Open market activities of buying and selling assets on the open market is one action the government may use. Through open market operations, the government may increase the economy's liquidity by purchasing assets from banks and the general public. Reducing the discount rate, i.e. the interest rate at which the central bank provides short-term loans to banks, will result in a decrease in the rate at which commercial banks offer loans to the general public, leading to a rise in consumer and investment spending. By reducing reserve requirements, commercial banks will be able to make more loans to the economy. When banks issue more loans, the economy creates more credit. How are these steps effective? Explain your answer
If the U.S. economy enters a new financial crisis, the government may use
Open market activities of buying and selling assets on the open market is one action the government may use. Through open market operations, the government may increase the economy's liquidity by purchasing assets from banks and the general public.
Reducing the discount rate, i.e. the interest rate at which the central bank provides short-term loans to banks, will result in a decrease in the rate at which commercial banks offer loans to the general public, leading to a rise in consumer and investment spending.
By reducing reserve requirements, commercial banks will be able to make more loans to the economy. When banks issue more loans, the economy creates more credit.
How are these steps effective? Explain your answer.
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