Under the recessionary gap, an easy policy should be implemented Because the economy is already in recession, the government should implement simple policies that stimulate aggregate demand and assist the economy in returning to its optimum production.
What is the monetary policy?
Monetary policy is the policy implemented by a country's monetary authority to manage either the interest rate on very short-term borrowing or the money supply.
Some examples regarding the policy tools are as:
- During the recession, the Federal Reserve reduced the required reserve ratio for banks. As a result, the banks have retained greater surplus reserves, and they may now lend more at lower interest rates, thereby increasing aggregate demand in the economy.
- During a recession, the Fed lowers the discount rate. The discount rate is the rate at which commercial banks can get short-term loans from the Fed.
- When the discount rate is lower, commercial banks may borrow from the Fed and expand their lending at lower interest rates, resulting in a rise in aggregate demand in the economy, which is critical for the economy.
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