Following the “great recession” of 2008-09, the central bank had used all of its
ID: 1196351 • Letter: F
Question
Following the “great recession” of 2008-09, the central bank had used all of its traditional tools to try to stimulate the economy. Interest rates were at historic lows, but the economy still needed more help.
The Fed then embarked on a new strategy, one it had never used before called “quantitative easing”. Basically The Fed credited its electronic bank account with new money (the modern version of printing money), then used the money to buy financial assets. The idea was that this “new money” would be pushed into the economy, thereby increasing the amount of money banks had on hand, which would hopefully result in more lending and therefore economic activity.
Many economists were concerned that this increase in the number of dollars circulating would result in inflation, in accordance with the implications of the quantity equation/ quantity theory of money (from the end of chapter 14).
Essentially, the Fed made a decision on behalf of our society to pursue economic growth at the risk of causing inflation. With this in mind:
1) Is this a good tradeoff? Why or why not? Please use economic reasoning (marginal analysis) in your explanation, and support your position with online research. In your response, please include a link to at least one article or website supporting your position.
2) A) Should The Fed have the authority to make these tradeoffs on behalf of our society? Recall that the Fed presidents are not elected by the citizens, they political appointees.
B) Considering how little most voters know about economics, and how crucial the economy is to our well-being, would it make sense to allow the voters to make decisions about who runs the Fed?
3) A politician named Ron Paul, and many of his supporters, feel that the Fed should be abolished. Please do some brief internet research and figure out why these people feel the fed should be abolished. Considering the role The Fed plays in our economy, what do you think would be the effect of this sort of policy?
Explanation / Answer
1) it is a good tradeoff because Fed has introduced "quantitative easing" method to increase the circulation of money in order to use the money to buy financial assets which will help businesses to lend money in low interest rate.
2) A) Yes, the Fed have the authority to make these tradeoffs on behalf of our society. in normal situation it doesn't make trade off but, in acception(great ressesion) it has to.
B) No, in the case given it doesn't make sense to allow the voters to make decisions about who runs the Fed.
3) Opposition says many things about the government to abolish present governance and to come into rule.
As the nation’s central bank, the Fed basically does three things:
a). It works to keep the banking, financial, and payments systems safe, sound,
and stable.
b). It also provides financial services to the government and the public.
c). Finally—and very importantly—the Fed’s conduct of monetary policy
contributes to the long-run health of the economy by promoting maximum
sustainable employment and stable prices.
considering the role the Fed plays in our economy, I think following could be the effect of this sort of policy
Keeping inflation low is the best way a central bank can promote maximum sustainable growth and employment, which are keys to the nation’s economic health.
Both research and experience have shown that if we stimulate the economy all the time, the gains against unemployment are temporary, at best. The reason is that, in the long run, unemployment depends on things that
are beyond the reach of monetary policy. Instead, it depends on things like technological change,and people’s preferences for saving, risk, and work effort. But the inflation we get from overstimulating is permanent. It has to be wrung out of the economy,and the way to do that, unfortunately, is to go through the pain of slow growth or even recession.
So, if the Fed tries to achieve too much of a good thing, it ends up making things worse.(Robert T. Parry, President, Federal Reserve Bank of San Francisco; Fed Focus: A Community Conferenc eFairmont Hotel, San Jose, California; September 21, 1999)