Question

Beginning in 2008, the Federal Reserve and the US Treasury Department responded to the financial crisis by intervening in the financial markets in unprecedented ways. Briefly summarize the action of the Fed and the Treasury.

Answer 1

Answer:

The Fed mainly used two monetary policy tools to respond to the crisis: the discount rate, and open-market operations.

The Fed lowered the discount rate so that banks could borrow from the Fed at a lower price. This helped inject liquidity in the financial system, and revitalize the economy,

Secondly, the Fed implemented a policy known as quantitative easing, which is a type of open-market operation, but with much greater scope. Quantitative easing is a policy whereby the Fed buys goverment bonds for a longer period of time instead of the short-term government bonds it usually buys. These longer-term bonds have lower interest rates, and help increase the money supply. The Fed resorted to quantitative easing because inflation was very low, unemployment was very high, the economy was in recession, and traditional expansionary monetary policy would have probably not been enough.

Years later, the European Central Bank followed these steps when the soverign debt crisis several european countries.

Explanation: