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The cause- effect chain used during recession and inflation are measures that the government manipulate money supply to either increase or decrease consumption and investment. As the money supply increases this pulls the economy from the recession to a better status. The opposite is true for the inflation chain as well. As bonds are sold and interest rates increases this deter people from borrowing and hence decrease the money supply in the economy. As the supply of money is reduced in circulation this helps stabilize prices during inflation period.
What are the major strengths of monetary policy?
Control the flow of money supply by increase the supply during recession and decrease during inflation. This allows for lending and investment by reducing interest rates, decreasing reserve ratio to increase excess reserves during recession. This helps the government to regulate, promote economic growth and stabilize prices and economy during recession and inflation.
