stabilizing economic struggle

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grrobar23

Economics

Question Description

In times of a struggling economic situation, determine the key steps that the Federal Reserve should take to help stabilize the economy.

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Explanation & Answer

The Federal Open Market Committee (FOMC) of the Federal Reserve System (Fed) meets approximately every six weeks to decide on its use of the two policy tools at its disposal: setting the federal funds rate and engaging in open market operations. (Note: changing the reserve requirement is a rarely used third tool). The federal funds rate is the interest rate at which banks lend funds to other banks, using the Federal Reserve as an intermediary. Open market operations consist of buying and selling financial assets, changing the lending capacity of financial institutions.

The Fed instituted an asset buy-back program in 2008 in an effort to stimulate the economy (QE1). This program has been renewed (QE2 and QE3) until October of 2014. In addition, the FOMC has maintained the federal funds rate target at a range of 0 to 1/4 percent since its December 16, 2008 meeting.  The fed funds rate has been kept at this historically low level because of the low (or sometimes negative) growth rates of real GDP due to the lingering effects of the recession.


ivpxl qnivq (178)
Purdue University

Anonymous
Really useful study material!

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