Question

List two policy actions the Federal Reserve enacted recently and explain how it is intended to help the economy

Answer 1

The Federal Reserve is trying hard to be able to revive the economy and is focussing towards ensuring liquidity in the markets once the corona virus pandemic is over. The main aim is to ensure that there is sufficient money available once the lock down is lifted, and we do not face a deep recession.

Accordingly, two major policy decisions which have been taken are as follows: -

1) Reducing Reserve Requirements: -

Cash Reserve Ratio, is the minimum amount of money, which commercial banks must hold with the Federal Reserve at any given point of time. The Federal Reserve recently reduced the same to 0 meaning that banks no longer need to keep money with the federal reserve and can extend loans freely in the market.

The aim here is to make availability of credit easy. Banks may face tight situation as many people may default as a result of the pandemic. The resultant is that it has reduced reserve requirements and the economy would have extra money available which will help in stabilizing the aggregate demand as people will consume more and have higher opportunity to take loans from banks.

2) Open Market Operations: -

Another key policy decision which the Federal Reserve has taken is to allow for open market operations. This increases the supply of money in the economy directly. The Federal Reserve purchases bonds from the market, and infuses the market with excessive cash. Those that hold these bonds such as banks get additional capital which is then lent out in the market place.

Increasing the liquidity of money is important in this phase as suppliers as well as consumers would have high volumes of cash available with them and the market would return back to normal.

Please feel free to ask your doubts in the comments section.