How can the Fed stimulate the economy?

Reply Wed 14 Aug, 2013 06:49 pm
The Fed is supposed to regulate the economy. It does so by setting interest rates for banks and by buying or selling securities on the open market. These activities increase or reduce the amount of money available for investment.

Reducing the amount of money available for investment can certainly lower the level of economic activity. But if the level of economic activity is already low, how can increasing the amount of money available for investment create more activity?

The theory seems to be that if investors and entrepreneurs have enough money, they will create jobs and employ workers. But if I were an investor or an entrepreneur, I wouldn't do that. I would look first to see whether there was an opportunity for profit. If consumers don't have enough money to buy more stuff than is already on the market, creating jobs to employ workers to create more stuff than can be sold is a losing proposition.

So my question is this: who are the investors and entrepreneurs who are dumb enough to create jobs in a slow economy, when there are no customers for their product, just because they have money to invest?
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