Question

Principles of Macroeconomics

Discussion: Impact of Low-Interest Rates on Monetary Policy
Please respond with a minimum of 100 words

Since the end of the Great Recession, interest rates have been at historic lows in the U.S.A—in some cases, close to zero. How is expansionary monetary policy, or more specifically an 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

Monetary policy is used to restore stability and full employment to economy. Monetary policy has been used during the economic recession and it has shown positive impacts on economy.

Fed uses expansionary monetary policy when recession hit economy. Fed buys securities from open market thereby leading to rise in money supply in economy,. Rise in money supply causes fall in the interest rate. Fall in interest rate encourages investment and aggregate demand shifts to right. Thus, helps to deal with deficient demand.

But interest rate might not work when it approaches zero. Fed can not reduce it further, Thus, Fed goes for Quantitative Easing to spur further economic activities and aggregate demand. Thus, Fed begins to buying sub standards assets and securities. These toxic assets further drive up aggregate demand.

Economic recession of 2008 was adequately and appropriately dealt with by the quantitative easing. Growth rate increased and employment opportunities increased.