Key Concepts
1. Describe the common monetary policy used to correct a weak economy or high inflation.
2. Explain the tradeoff involved in the Fed’s use of a loose or tight monetary policy.
3. Explain how financial market participants would react to a particular monetary policy.
4. Explain how fiscal policy may influence the monetary policy.
POINT/COUNTER-POINT:
Can the Fed Prevent U.S. Recessions?
POINT: Yes. The Fed has the power to reduce market interest rates, and can therefore encourage more
borrowing and spending. In this way, it stimulates the economy.
COUNTER-POINT: No. When the economy is weak, individuals and firms are unwilling to borrow
regardless of the interest rate. Thus, the borrowing (by those who are qualified) and spending will not be
influenced by the Fed’s actions. The Fed should not intervene, but rather let the economy work itself out
of a recession.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: It is difficult to determine how long a recession would last if the Fed did not intervene.
However, most people (especially the unemployed) would prefer that the Fed make an effort to stimulate
the economy. There is some concern that a stimulative monetary policy may cause more inflation, but this
is a risk that the Fed must take in order to cure a recession.