Question

Is the Federal Reserves recent monetary policies ineffective? Is keeping the interest rate at 0% percent actually stimulating the economy for long term growth of the GDP?

Answer 1

No, the Federal reserve's recent monetary policies are not ineffective. They goal of the current monetary policy is to increase the rate of growth of GDP of the economy and also achieve price stability in the economy. The recent monetary policy aims at keeping the interest rate at zero per cent which will help in stimulating the level of investment in the economy because rate of interest represents the cost of investment in the economy. As the rate of interest declines, the investment level increases in the economy which in turn increases the level of aggregate demand in the economy because investment expenditure is one of the components of aggregate demand. This increase in aggregate demand will increase the level of national income in the economy which in turn increases production level in the economy. As the overall production level in the economy increases, the long term growth rate of the GDP will increase in the economy. Thus, the recent monetary policy of the Federal reserve is effective.