Question

Choose 1 of the following topics related to the Great Recession: The banking industry crisis, bailout of commercial and investment banks

Write a 350- to 700-word analysis of 1 of the following corrective actions taken by the Federal Reserve as a result of the crisis:

• Quantitative easing
• Purchase of toxic assets from financial institutions
• Paying interest on reserve balances

Address the following in your analysis:

• Actions taken by the Federal Reserve to mitigate the crisis
• How the corrective action helped to restore stability to the financial system
• How the corrective action should prevent recurrence of a similar crisis

Answer 1

The above graphs show how unemployment increased to 11 percentage and above and work productivity declined during Great Recession and subsequently the government had adopted expansionary monetary policy to cit down interest rates to 0.75 percent and hold constant till 2015 and indulged in buying 800 billion dollar government securities as part of open money operations and quantitative easing programme.

The interest rates prior to 2007 from 2005 were relatively higher as contractionary monetary policy was practised by US FEd due to high inflation and hot money flowing in from Asian financial markets.

The period of 2010 to 2015 saw interest rates constant, coupled with an expansionary fiscal policy like unemployment insurance, program like TARP and TNAF and tax cuts and tax credits to businesses.

The macroeconomic intention here was to revive the economy to greater heights and minimise deflation such that the US dollar also stabilises and inflation targets remian well within 3 percentage band.

This crested ripple effect as liquidity rose substantially and disposable incomes rose for 22% of individuals after tax cuts, unemployment insurance provided the fillip, and unemployment reduced due to higher credit availability to corporate which all sledgehammered the economy to better position of 0.5% year on uear GDP growth and ultimately fructifying to robustness by end of 2015 post which US fed looked to raise the interest rates after Donald Trump election in 2016.