Question

When the US economy severely declined in 2007, what phenomenon would make global markets panic? A.international treaty participation B.The Federal Reserve C.globalization D.sovereignty of nations

Answer 1

The correct answer is B) The Federal Reserve:

Since the beginning of the crisis in August 2007, central banks have shown a great capacity for reaction. They have also acted both to avoid a systemic banking crisis and to limit the impact on growth. In addition, the US Federal Reserve eased monetary policy by injecting liquidity and, eventually, acting on interest rates.

Banks are traditionally financed by borrowing money in the short term in the interbank market. But the financial crisis that began in 2007 has been characterized by a great mutual distrust among banks, which led to an increase in interbank rates. Interbank rates far exceeded the central bank's guide rate. In addition, central banks have intervened massively to inject liquidity, hoping to reduce money market tensions and restore confidence. The monetary policy has also been characterized by an extension of the duration of the loans, an extension of the guarantees and the possibility of obtaining refinancing.

In addition to providing liquidity, in order to reduce the impact of the financial crisis on growth, the Fed has lowered its guideline considerably, which has gone from 6% at the beginning of 2007 to 0.5% at the end of 2008. On the other hand, the ECB has not lowered its guideline type.