Question

In: Economics

Choose two expansionary monetary policy actions that the FED has taking recently to counter the economic...

Choose two expansionary monetary policy actions that the FED has taking recently to counter the economic impacts of the corona virus. How are the policies supposed to help?

Solutions

Expert Solution

The corona virus pandemic has shaken the U.S. economy. To help this situation caused due to the COVID-19, the Fed has opted for expansionary monetary policy. The two expansionary monetary policies opted by Fed are discussed as below:

-- Open market operations (also abbreviated as OMO) refer to the purchasing of government securities in the open market for the purpose of expansion of the amount of money in the banking system, facilitated by the Federal Reserve (Fed). The Fed restarted quantitative easing with the buying of $200 billion in mortgage-backed securities and   $500 billion in treasuries. It will increase the money supply with the goal of attaining low inflation and sustainable growth in the economy.

-- Reserve requirements refers to the portions of deposits that banks are required to hold in cash, either in their vaults or on deposit at a Reserve Bank. The Fed on 12th March expanded massively the reverse repo operations, with an addition of $1.5 trillion of liquidity for banking thus indicating an extension of the amount of short term loans to banks to keep stability in the money markets and permitting the banks to have more cash on hand. The capital requirements for banks are lowered. The banks are also encouraged by Fed for using the liquidity and capital buffers to lend, which are funds reserved to face the hard times. A fall in reserve requirements will be an expansionary monetary policy because it raises the funds available for the commercial banks to lend to businesses and consumers.


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