Question

Respond to the following prompts in a post with a minimum of 100 words.

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

• In an open market purchases securities which adds money to the system while making loans easier to obtain, which results in the decline of interest rates. Near-zero interest rates limits the ability of expansionary monetary policy since it effectively blocks the Fed's use of primary tool. It also impairs the ability of the public​ (investors) to understand the central​ bank's actions and signals. Fed responded to this quandary by relying on non traditional and less familiar tools such as quantitative easing.
• Fed's policy has been effective in dealing with the crisis as these policies drastically reduced the short-term interest rates and lowered long-term interest rates with the help of quantitative easing, while being successful to maintain a two percent target of inflation.