Monetary Policies as Remedies for the Great Recession:
An Analysis on the Effectiveness, Rationale and Criteria
In the year 2008, the burst of housing bubbles began to occur in the North American real estate market along with the Great Recession which swept through most countries around the globe, leading to disastrous impacts on the global economy including dramatic growth of unemployment, collapse of the financial markets, political instability and many other concerning outcomes. These alarming economic downturns drew the attention of economists and government authorities to the implementation of effective remedies for the crisis. Effective and practical solutions were urgently demanded in order to stimulate consumption without significant
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In theory, when the central bank increases money supply, increase rates will drop and investments will rise due to the falling return on interest-bearing savings. The increase in investments will push up aggregate expenditure, resulting in a greater equilibrium output level, followed by an excess supply in the goods market. The larger output will motivate money demand, which will place an upward pressure on the interest rates, and hence will cause the aggregate expenditure to fall back down. However, the overall impact of an expansionary monetary policy should provide a higher equilibrium income and lower interest rates. So far, this seems like a perfect strategy to stimulate aggregate demand and resume economic activities. According to Okun’s Law, unemployment rate will fall by 1 percentage point during each year that the growth rate of GDP exceeds the growth rate of potential output by 2 percentage points (Fawley, Juvenal, 2010). The demand side of the labor market will also increase, since a decrease in real interest rates affects the cost of capital, which influences capital accumulation and the demand for labor. (Blanchard, 2003). In practice, the Federal Reserve System in the US implemented monetary intervention since September 2008. Firstly, it increased money supply by printing money, which aggressively moved the interest rate to almost zero. Then in December 2008, the Fed adopted a strategy known as “quantitative easing”, which involves massive purchases of government bonds by the central bank. These loans to the government further improved money supply. So the question arises: The national unemployment rate of the U.S. was 5.0% in December 2007, and the figure increased to 10.0% in October 2009 (Bullard, 2010). Although there is not enough evidence for us to claim that the expansionary
Principles of Macroeconomics ECON210 -1601B-10 Instructor: Kunsoo Choi Unit 3- Fiscal Policy and Government Spending Amanda Kranning March 6, 2016 Fiscal Policy and Government Spending Part 1: Assuming that the country (United States) is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Then the fiscal and monetary policy can be applied to move the numbers to acceptable levels while keeping inflation at the lowest level.
I will describe how expansionary activities by the FED impacts credit availability, money supply, interest rates, and security prices. The FED uses expansionary activities to control credit availability to banks either up or down depending on what it sees as needed. This is done through the ratio rate. The lower the rate the more money a bank has to loan. The lower the rate the less money the bank has to keep on hand which means the bank has more money to loan(Tarver, E.,2015, May 28).
“If you want to understand geology, study earthquakes. If you want to understand the economy, study the Depression” (Ben Bernanke Quotes). Ben Bernanke, a tenured professor at Princeton University, served two terms as the Federal Reserve chairman from 2006-2014 and orchestrated the Fed’s actions during the Great Recession. Being a student of the Great Depression, Mr. Bernanke’s policies and regulations surrounding the late 2000’s crisis reflected the adaptations to the Fed’s failed actions in the 1930’s. Throughout economic history, the stability and health of our economy depends on the balance achieved by the Federal Reserve over their three major roles: Monetary Policy, Regulation, Lender of Last Resort.
In the Recession of 2007 the economy used the monetary and fiscal policy to keep the economy falling into another Great Depression. In the Recession was greatly used to fix the economy but was fairly new in during the Great Depression since it was established in
On March 15, 2017, the Federal Reserve has risen its interest rate by 0.25 percent. With this increase, the minimum interest rate that investors demand on their investment increased from 0.75 percent to 1.0 percent. This is the second increase in a span of 3 months, with the previous one occurring during December 2016. With two increases happening so quickly, pulling the interest rate away from zero which occurred during the economic depression of 2008, people finally have more money to spend as the Federal Reserve is increasing borrowing costs. Before December 2016, the economy was growing much more slowly than it is now, as it had been 12 months before the Federal Reserve had increased the interest rate.
During the early years of the depression, FED followed continuously a restrictive monetary policy, what many economists believe was what turned a recession into a depression. In the years 1930-1933, more than 9,000 banks failed (50%) and the money supply fell from 26.6 billion dollars to 19.9 billion dollars. At this time, the unemployment rate increased from 3.2 to 24.9 percent. What economists generally argue on, like Friedman and Schwartz is that the FED should have reduced the discount rate which allowed member banks to borrow, and purchase bonds through the open market operations, in order to fight bank failures and unemployment in the U.S economy, this way also contributing to increases in the money supply. Yet, the Federal Reserve paid more close attention to the international gold standard.
The Presidents during the Great Depression and Great Recession, Franklin Delano Roosevelt and Barack Obama, respectively, resorted to similar actions in order to combat the economic catastrophes. President Roosevelt brought about the New Deal which consisted of programs, economic reforms, and regulations, to alleviate the conditions of Americans. But, at the same time, it was implemented in order to increase the extent to the government’s power and influence. Steve Hanke, an applied economist at Johns Hopkins University, states that similarly, “this type of intrusive response has also followed the Great Recession, ushering in a plethora of government regulations, particularly those that affect banks and financial institutions” (Hanke). Implementing these regulations and reforms requires large spending, so another parallel drawn can be the respective increase in government spending.
A method the Federal Reserve has used especially since the Great Recession is quantitative easing. In this method, the Federal Reserve buys government securities or other securities on the market. These securities are also known as bonds. By purchasing enough bonds, the Federal Reserve lowers interest rates and increases the money supply, in theory stimulating the
The forty-six billion the Fed gave to lenders was two-hundred times more than the daily average. The quick infusion of cash was a far cry from normal Fed operations. On the day of the 9-11 attack, the S&P 500 dropped 4.9% and continued to go down causing markets to crash in less than a weak. The Federal Reserve’s quick and decisive action, however, helped the markets return to normal in just over 19 days. This action helped keep the U.S economy stable and prevent an economic
The tool that is mostly utilized by the Federal Reserve is the so called Monetary Policy, which is best described as the activities that the Federal Reserve assumes in order to create a change or affect the credit and the amount of money that circulates in the U.S economy. By changing the amount of money and credits circulating through the economy, the Federal Reserve is able to control or have an effect in the cost of credits also known as interest rates, which would result as lower prices in interest rates, factor that promotes and positively affects the U.S economy. There are three tools that the Federal Reserve utilizes to influence the Monetary Policy: one is to buy and sell U.S securities in the financial markets, also known as open market operations, which main purpose is to influence the level on the reserves in the banking system, as well as
What are some recent examples of what the Federal Reserve has done to help with monetary policy during “The Great Recession” and what are their goals right now? Has their policies been successful? What is the future of American monetary policy and the actions of the Fed? a. The Federal Open Market Committee pursues to explain its monetary policy decision to the public as clearly as possible. Recently, during a meeting, the FOMC issued a statement referring its longer goals and monetary policy strategy.
Around the 1950’s, the Federal Reserve was devoted to keeping a low interest rate on government bonds after we entered World War II. They did this so the government has the ability to have a less expensive debt funding after the war. In the early 60’s, low inflation was maintained, but in the late 60’s, inflation just kept going upward. Although from 1984-2006, the Fed had some success despite the stock market crash of ’87 and terrorists attacks from 2001.
People withdraw money from the banks which then decreases the amount of money that the bank can lend. Since the Fed now holds that money, the amount of money in the economy
In order the help end the recession the United States government along with the Federal Reserve used Fiscal and Monetary to help prevent a worst catastrophe. Fiscal Policies During the Great Recession, there were quite a few Fiscal Policies implemented. The first policy to be implemented was the Economic Stimulus Act of 2008.
The Great Recession was a period of general economic decline observed by world markets beginning around the end of the first decade of the 21st century. The recession was a result of a financial crisis in 2007 which effected the years to come . The primary source of this problem was that banks were creating too much money. In addition, banks had doubled the amount of money and debt in the economy. Resulting in a financial crisis as the government and banks had failed to constrain the financial system’s creation of private credit and money.