Carefully explain how monetary policy can be used to counter a recession. Explain what the central bank does as well as how its actions affect the economy. Under what circumstances is fiscal policy especially useful?

To counter a recession, a central bank reduces its interest rate target. To do this it would increase the money supply by buying bonds. The decrease in the interest rate raises investment spending. The increase in investment spending causes aggregate demand to shift to the right raising output. If the central bank decreases the nominal interest rate to zero, it cannot decrease it further. In this case if the economy is still in recession, tax cuts and increases in government spending can be used to increase aggregate demand further.