Question

In 2009, the Federal Reserve reduced the target federal funds rate from 2% to almost 0%. What impact did that have on the Fed’s ability to make monetary policy in the future?

Group of answer choices

a. It allowed the Fed to begin using fiscal policy tools to supplement its traditional monetary policy tools.

b. It made it difficult to use traditional monetary policy tools to fight further increases in unemployment.

c. It shifted the Fed from an expansionary policy to a contractionary policy.

d. It moved the Fed from neoclassical analysis to Keynesian analysis.

Answer 1

Option B.

• We know that a lower federal funds rate would increase the aggregate demand and employment rate within the economy.
• If Fed decreases the target federal funds rate, then lending and borrowing would become easier.
• But this would remain effective only for a short duration of time.
• If the target federal funds rate is reduced further to zero, then in future it may be difficult for the Fed to use traditional monetary policy tools to fight against an increase in unemployment.