In the long-run, our economy continuously grows. Along this path of growth, there are periods of contraction that may lead to a recession or depression, as well as periods of expansion that may lead to inflationthese fluctuations in the economy impact employment, prices, wealth, distribution of income, and stability. Given the harmful effects of the peaks and troughs in the business cycle, the government uses a variety of tools to prevent, reduce, and recover from these extremes. In Part 1, you will apply the various monetary policy tools that may be used to deal with inflation and recession. In Part 2, you will apply fiscal policy to deal with these economic problems. As you work through, you will investigate relationships and differences between the factors of production growth, the financial system, unemployment, inflation, and economic stability.

The Federal Reserve System has five key responsibilities: managing the national monetary policy, maintain the stability of the financial system, supervise and regulate financial institutions, promoting a safe and efficient payment and settlement system, and providing consumer protection and community development. In order to maintain low unemployment, stable prices, and moderate long-term interest rates in the U.S. economy, the Federal Reserve Board (Fed) meets regularly to determine what changes need to be made to the monetary policy and financial regulation.

On behalf of the Fed:

• Describe the problem and impact that a recession has on the economy as a whole and the various economic entities (individuals, firms, financial institutions, etc.).
• Identify and summarize three specific monetary policy tools that the Fed has to combat in a recession.