Question

• Since the end of the Great Recession, interest rates have been at historic lows—in some cases, close to zero. How is expansionary monetary policy, or more specifically a open market purchase, supposed to work? How do near-zero interest rates limit the ability of expansionary monetary policy to work?
• How has the Fed responded to this quandary? That is, what policies has the Fed conducted?
• In your opinion, how effective has the Fed’s policy been as a response to the Great Recession? What evidence can you suggest to support your position?

Answer 1

1. During the times of Recession the Federal Reserve which is the central bank of the nation, increases the circulation of the currency which obviously increases the supply of money in order to improve the loan provision of the bank to the consumers.

2. The phenomenon mentioned is often known as the Expansionary Monetary Policy which is done in order improve the growth of the GDP improving the economic growth indirectly.

3. Zero-bound interest rates refer to a rate wherein there will be no improvement in the economic growth by the implementation of the monetary policy if the rate is higher than that.This definitely points out the short term interest rates.

4. The European Central Bank had tried a negative rate strategy which is a deposit fee in 2014 of overnight lending. Japan even tried the zero interest rate policy and had been saved from deflation and stood as an example for the other developed nations.

5. The usage of tools like lender of last resort which involved short-term credit provision to banks, institutions, etc,., provision of credit directly to the investors and borrowers and expansion of its open market operations in order to support the credit markets, etc,. which have been performed very well by the Fed in response to the Great recession which put out its nation from the pitfall.