The effect of the February 2008 tax rebate on spending was ...

[sheilaspns]

The effect of the February 2008 tax rebate on spending was reduced due to ________.
 
  A) the simultaneous missteps in monetary policy
  B) the negative impact of the policy on saving rates
  C) the recognition that the rebate did not constitute a permanent change in income
  D) the small size of the program

Question 2

Why were traditional Federal Reserve policies ineffective during the 2007-2009 recession?
 
  What will be an ideal response?

[momolu]

Answer to Question 1

C

Answer to Question 2

The traditional Fed policy response to a recession is to reduce the short-term nominal interest rate. Normally, this will decrease the long-term real interest rate, so long as term structure effects, the default-risk premium, and the expected inflation rate remain constant. This traditional policy could not operate during much of the recession because the target for the federal funds rate had been lowered to near zero by the end of 2008. This forced the Fed to adopt new policies to attempt to increase real GDP and employment.