This week we are going to review the tools of monetary policy (the tools the Federal Reserve uses to manage the money supply) and focus on the most basic measure of the money supply: the monetary base. During the 2007-2009 recession and the following weak recovery years, the Federal Reserve used some unconventional methods to try and stimulate the economy. Normally, the FED only buys US government bonds as part of it’s Open Market Operations and usually it only accepts US government bonds as security for loans through the Discount Window (the Discount Rate is the interest rate for such loans).
However, during the above period, the FED also bought (and accepted as security for Discount Window loans) unconventional (for the FED) assets such as commercial paper and mortgage backed securities. These actions kept those financial markets liquid when otherwise they would have “frozen up” due to a lack of funds going into them. Buying these unconventional assets also increased the money supply very much like normal Open Market Operations would.
At the same time, the FED was using Open Market Operations to purchase very large amounts of US government securities. The FED was buying $85 billion in bonds every month for a considerable period of time. These purchases also involved an unconventional approach called Quantitative Easing.
1) Review the videos above.
2) Read the textbook article ( pp. 423-424) Explaining the Explosion in the Monetary Base.
3) Undertake additional research as needed. Remember that citations and references are needed.
4) In your discussion consider at least the following aspects of the above FED actions:
Where they effective in ending the recession and stimulating a recovery in a timely fashion? (For comparison, you may wish to review past business cycle time periods by examining the business cycle data at the National Bureau of Economic Research.)
What was the impact on the housing market from the FED’s purchases of mortgage backed securities?
What is the risk of inflation presented by the huge growth in the monetary base? What has been the inflationary/deflationary impact(s) of the growth in the monetary base so far, if any?
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