Macropoland is currently experiencing a recession--consumption and investment are very sluggish, and unemployment is quite high at 9%. Currently, inflation is very low at 0.4% (the historical average...

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Macroeconomic aggregates in an economy are influenced by many factors and are all inter-
connected with each other. Any movement in one macroeconomic aggregate will make changes
in the other aggregates as well, thus influencing overall growth of the economy. In the given
scenario of Macropoland, consumption level and investment level are the components of total
aggregate demand in a country. They are growing at sluggish rate which means that the overall
aggregate demand in an economy is also less. Therefore, Federal bank should indulged into
expansionary monetary policy through open market operations, reduction in cash reserve ratio
and moral suasion. In order to raise the aggregate demand, there will be a need to raise supply of
money in the economy by making purchase of government bonds by the Federal Bank. It
increases the money in the hands of the people and hence their purchasing power will increase.
They would be able to buy more quantity of goods and services, thus stimulating the overall
demand in the economy. For instance, at the time of the Great Depression of 1930s in the U.S.
when there was sharp reduction in consumption and investment level due to crash in the stock
market. At that time, the President Franklin Roosevelt passed various legislations and reforms
for stabilizing the...