What limited the effectiveness of monetary policy during the Financial Crisis of 2007-2009?
What will be an ideal response?
During the financial crisis, the default risk premium soared as investors feared that firms would have difficulty repaying their loans or making the coupon and principal payments on their bonds. By the end of 2008, the Fed had caused the federal funds rate to fall nearly to zero, but the rise in the risk premium counteracted the effects of the Fed's expansionary policy. The Fed attempted to bring down long-term interest rates by taking the unusual step of directly buying both 10-year Treasury notes and mortgage-backed securities, but the Fed was not able to entirely offset the effects of the increase in the risk premium.
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When output is held constant, inflation does which of the following?
(a) Increases real GDP (b) Increases real income (c) Increases government spending (d) Reduces the purchasing power of individuals living on fixed incomes.
In an interview an economist states, "This problem should be of greater concern to the federal government." We can explicitly put this statement in the category of
A) microeconomics. B) macroeconomics. C) positive economics. D) normative economics.