Homework Clinic
Social Science Clinic => Economics => Macroeconomics => Topic started by: brandy.spencer on Dec 4, 2019
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How did the Federal Reserve begin to take a more active role in financial markets in 2008? How have these actions impacted the Fed's balance sheet? In your opinion, did this more active role have a positive impact on the US economy?
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The federal reserve system tries to protect against inflation, unemployment, and the possibilities of rescission by introducing interest rate cuts, assisting ailing financial institutions, printing new money to be used (quantitative easing), and forward guidance about interest rates.
Take, for example, the fight against unemployment. By cutting tax rates, the Fed boosts the economy by reducing the interest rate that banks pay each other for overnight loans, the federal funds rate. The idea is that cuts to the federal funds rate lead to lower interest rates throughout the economy. Those low rates spur businesses to make new investments, spur people to buy houses or invest in renovations, and spur purchases of major durable goods like cars. When the economy is depressed and has lots of excess capacity — unemployed workers, vacant offices and storefronts, idle factories — all that extra spending leads to an increase in employment and economic output.
While the recession was bad, the tactics instilled by the Fed prevents a repeat of the Great Depression; essentially, they successfully avoided that cataclysmic scenario.
Hope this helps!