Question

The Federal Reserve is facing tough challenges today. We currently have a COVID-19 virus crisis taking place. In response, the federal, state, and local governments have ordered shutdowns across the nation. Unemployment has skyrocketed, maybe 10 to 20 percent of small businesses will not recover from this shock, housing foreclosures will probably rise, car repos will increase, having a bad credit history will probably become more common, poverty rates will climb, and more people will become dependent on government programs for survival. What a mess!!!

If you were the Chairman or Chairlady of the Federal Reserve Bank, what would be your two top policy recommendations that the Federal Reserve Bank could carry out to help the U.S. economy? Please explain why you think your two ideas would work?   

Answer 1

Answer - The two policy recommendations will be as follows -

1 - Reducing the discount rate -

By reducing the discount rate , the banks will be able to borrow from fed at a lower rate. This will enable the banks to lend at lower rates to the borrowers. The cheaper loans will help to increase the investment in economy. This will increase the output , reduce unemployment and increase the income which will help to enhance the growth rate.

2 - Decreasing the reserve requirement will also enable the banks to lend more amount to public. With greater ability to borrow , consumption and investment practises will increase leading to the rise in AD. This would provide the way for growth in this period of pandemic.