Question

The Federal Reserve used two unconventional policies to stimulate the economy during the 2007-2009 recession: (1) Quantitative Easing and (2) Forward Guidance. Briefly explain these policies and particularly, highlight how these policies worked and explain the channels (transmission mechanisms) through which these policies helped to stimulate the economy.

Answer 1

1.quantitative easing was done through cutting of a lot of interest rates which is one of the tool of the monetary policy of the Federal Reserve.

Federal Reserve aggressively cut the interest to the range of 0% in order to stimulate the demand into the economy and it also done a lot of bailout programs along with mergers and acquisitions and it also provided open market operations which is another tool of monetary policy in order to stimulate the economy which was facing the great depression.

2.Forward guidance was another tool which was used by federal reserve in order to provide an expectation of the economic progress in coming quarters in order to proactively manage the events and provide the market participants an idea about the overall economic trajectory, so federal reserve in order to proactively manage the economy introduced forward guidance into its policy.

Quantitative easing helped the economy to stabilize from the shock of depression and forward guidance also help a lot of industries to restabilize themselves along with the economic progress as there was complete management from the Fred and there was a complete assistance from the Federal Reserve too .

Quantitative easing was done through interest rate cuts, open market operations and providing of the emergency funding to the various banks.

forward guidance was provided through its monetary policy minutes and It helped to stabilize the economy proactively