Almost a decade ago, while the rest of the economy had nicely recovered from a recession, California remained mired in a deep recession. What could the Federal Reserve have done to help California? What should it have done?

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What the Fed could have done is stimulate the entire economy with expansionary monetary policy. This would have the effect of stimulating the rest of the economy as well, which might have been too inflationary. The Fed does not have the power to stimulate only a part of the economy. Because there will inevitably be some differences in the condition of the economy across different states, the Fed must undertake a balancing act.

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