Question

Provide a synopsis of the economic, and financial market and financial instrument impacts of the Quantitative Easing in the Great Recession (Harvard Case Study) announcements, considering:

o The behavior of long-term and short-term rates,

o Changes to credit default swaps, and

o Inflation expectations.

Answer 1

|The great recession started December 2007 from a combination of declining oil prices, domestic market prices and housing market prices. Several bank and financial institutions were heavily involved to mortgage and secure securities. Unemployment increase and there was a declining trend in the economy.Fed tried to influence the stock prices by changing interest rate.It Reduced the interest rate significantly as a quantitative Easing as a result of that economy started recovery .The quantitative easing measures stimulated the economic activities.Fed even purchased large amount of stocks

In the economic market the production decline leading to a decline in real output.The firms cut back ed and produced less,employing fewer workers and less capital .Thus the first and most direct cost of the recession was the loss of real goods and sevices. There was various quantitative ease measures to revive the economy from the recession.The FED lowered the interest rate leading to an increase in the money supply. As a result of that the people like to save their money more. So it discouraged the people from moving out of bonds and into money.Lowering the iinterest rate further increased the consumption increasing the money supply. The expansionary monetary policy reducing the interest rate led to an increase in output with little changes in the price level.

In the market economy the process of reversal results as an impact of quantitative easing. It begins in the labour market. The unemployment made the wages less than the prevailing rates during the recession. The producers anticipating better future try to maintain their capital stock and offer jobs to some workers here and there . consumers on their part expecting no further decline and price begin to resume their postponed consumption..As a result, demands rises.. Bankers having accumulated excess liquidity try to save themselves by lowering the lenting rate and by investing their funds in securities and bonds

The increase in government expenditure as a factor of quantitative is increased the output level employment and thus economy started reviving. The long term and short term interest rates changed by the FED stimulated the economy. All the economical variables began to revive. The expectation about the inflation made the FED to guide the economy in a slow down position which will not be inflationary. The interest rate increased in the long term to save the economy from the future inflation. It started pursuing a contractionary policy. This is to safeguard the economy from the inflation. Thus quantitative ease has got great impact on the economy, finance and all its variables.