Question

Which monetary policy did the Fed use during the COVID 19 pandemic? (i.e. expansionary or contractionary monetary policy) What monetary policy tools did the Fed use during the COVID 19 pandemic? Explain in terms of economics How does the Fed decrease interest rates? Explain in terms of economics.

Answer 1

The Covid-19 pandemic has destroyed economies all over the world including the US. As such there is a need to stimulate output and expansionary monetary policy is used. The tools used are many. The policy rate has been cut. This allows the commercial banks to borrow at a lower rate of interest and thus can reduce the cost of lending. This increases the money supply in the economy. The reserve ratios are also lowered which allows banks to provide more of their deposits as loans and increases the money supply. The central bank is also engaging in unconventional monetary policy such as Quantitative easing which involves purchasing long term government bonds by the central banks that also impart liquidity into the system and increase the money supply.