Question

Housing sales are dropping and many worry this is a sign that the economy is heading into a recession. Discuss an example of how the Federal Reserve may use a tool of monetary policy in this situation and explain the goals of using the tool.



someone, anyone help? :[
(my teacher is KILLINGG me) ._.

Answer 1

Well, this is almost redundant since this policy has been beaten to the ground in the states, which is reducing interest rates. The fed would just buy bonds, therefore increasing the money supply in the economy. With increased supply of money, the price to borrow that money decreases (the price to borrow money is interest rates).

Answer 2

Fair warning however, the US is currently in a liquidity trap. In other words, the Fed has already pumped so much money into the US economy that rates can't go lower with this policy. This is why QE is in effect because there has to be some other form of policy to maintain rates low, which is by buying other forms of assets.