question archive Person 1 The reason for interest rates being so low since the great recession is because of the federal reserve
Person 1 The reason for interest rates being so low since the great recession is because of the federal reserve
Subject:EconomicsPrice: Bought3
Person 1
The reason for interest rates being so low since the great recession is because of the federal reserve. During times of recession, the federal reserve improves the circulation of currency which therefore increases the supply of money to improve loan requirements of the bank consumers. This is also known as expansionary monetary policy, which describes why it happens and why it works. Near zero interest rates affect the ability of expansionary monetary policy because when that is the case, there is no economic growth that is occurring. This means that if you can not grow the economy the effectiveness of using expansionary monetary policy will not work. It means in easier-to-understand terms that when the interest rates are at a close to 0 amount, using the expansionary monetary policy will not work because it will not be enough to offset the lack of interest rates in the economy.
Person 2
Open market purchases would consist of the central bank (the Federal Reserve) buying Treasure securities in order to increase bank reserves and lower interest rates. That would increase the money supply. By increasing the money supply, interest rates would lower as there is more money to borrow and it would cost less to borrow more money. Expansionary fiscal policy would be limited as the interest rate could not turn negative if it was near zero. That would be the limit of expansionary monetary policy and open market purchases in markets where the interest rate is near zero. Open market purchases would try to increase bank reserves and lower interest rates, but interest rates are already near zero and can't turn negative. So, the monetary policy change has less of an effect as it's near zero and can't turn negative. The change would be small percentages. I think of it numerically like a number line where the line can't turn negative. We can't reach zero but we can get infinitesimally close to zero. Because of that the changes made near zero would be small and have very little effect on the interest rates.
