How does the government stabilize the economy?

Question

what do they do to stabilize it?

Answer 1

The Federal Reserve Bank of the United States is primarily responsible for regulating the economy. The Fed does this by manipulating the money supply. The more money in circulation the more economic activity. The fed has 3 primary tools to regulate the money supply.

1. Open market operations- The Fed buys and sells bonds on the open market to inject money into the economy and slow it down when the economy is growing to fast and inflation is high. This is used the most often but has the least effect.

2. Direct control over the Fed Funds rate. This is the rate that banks borrow from the fed in times of low capital. This has an effect on the prime rate that is used most often when borrowing money.

3. The Required Reserve Ratio is the last and most powerful tool. Hence, it is used the least. Right now most modern economies are running at around 10%. If you lower the reserves more money will be in circulation and stimulate the economy.

The Fed also does other things in special situations. They have levereged buy outs of collapsing finance companies to prevent a domino effect financial collapse. This has been very important. Recently the Bear Stearns buy out prevented financial meltdown. and in 1987 the purchase of common stock prevented a stock market collapse.

Answer 2

Through open market operations which is pretty much buying up securities and injecting the market with more money to stimulate spending. Thats what they have been loweing the interest rates, it takes about 1 year to see the effects of this stimulation. Problem is corporations have used it to benefit themselves and havnt really done much to help out the average joe, they are trying to make back all the money they lost in the housing crisis and anything else that was affected by it.