Explaining the Federal Reserve expansionary monetary policy of lowering the federal funds rate and the impact of these policies on Federal Reserve's balance sheet.
During 2007-08, the Federal Reserve adopted an expansionary monetary by lowering the federal funds rate target from 5.25% on 9/17/07 to effectively zero on 12/16/08.
a. Which policy instrument did the Federal Reserve use to lower its federal funds rate Target?
b. By lowering its federal funds rate target, what will happen to the level of non- borrowed reserves in the banking system? Explain briefly.
c. The interest rate channel and exchange rate channel predict that a lower federal funds rate target should raise aggregate demand (see the Ireland article). Which component(s) of aggregate demand is impacted by each channel?
d. The asset price channels and credit channels predict that a lower federal funds rate target should raise equity prices and increase bank lending (see the Ireland article). Explain briefly how the financial crisis is preventing these two channels from operating.
e. In 4th quarter 2008, the Federal Reserve implemented policies such as the Term Auction Facility (TAF), currency swap lines (CSL), primary dealer credit facility (PDCF), and commercial paper lending facility (CPLF). What economic goal is the Federal Reserve attempting to address with these additional policies?
f. Illustrate what was the impact of these additional strategy on the volume and composition of the Federal Reserve's balance sheet?
g. On 12/16/08, the Federal Reserve also announced that it will be using its balance sheet to support credit markets and the economy or what many Fed observers and economists term quantitative easing. What exactly is quantitative easing?
h. How did Japan implement quantitative easing in the early 1990s?
i. Why is the Federal Reserve using quantitative easing? What economic goal is the Federal Reserve attempting to address with quantitative easing?