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Crisis in the Federal Reserve Bank of United States of America in 2007 Essay

The central bankers of the Federal Reserve Bank of United States of America, the European Central Bank and the Bank of Japan have been included among the world’s most influential people due to their economic influence. To begin with, the federal reserve bank’s monetary decisions usually influence the adjustment in most of the world‘s economies, because most transactions take place using U.S. Dollars.

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On the same note, these economies are among the world’s top economies and any action taken by their monetary committee always has spillovers to other countries in the world (Kolb, 2010). These economies, being among the world’s top importers and exporters, usually change their money supply and interest rates which influence trade in the whole world; and this is usually done by the central bankers.

In March 2009, following the effects of the financial crisis the Federal Reserve Bank opted for an expansionary monetary policy. The FED announced its intentions to buy $300 billion longer-term securities, and increase purchases for agency debt to $200 billion and mortgage-backed securities to $1.25 trillion. The expansionary monetary policy meant that there was an increase in money supply, which increased the amount of money that people were holding.

In this regard, many people had money they were willing to deposit in banks while banks held a lot of money they were willing to lend (Kolb, 2010). Therefore, interest rates were reduced to discourage people from depositing money and encourage them to borrow from banks. On the other hand, due to reduced interest rates, exchange rates also depreciated in relation to other currencies (Hall & Lieberman, 2012).

The decrease in interest rates discouraged banks from passing on the credit to consumers because the return to the money was low. However, the banks had a lot of money in their possession and consequently relaxed their lending rules, to increase the chances of getting borrowers (Hall & Lieberman, 2012).

On the same note, the decrease in exchange rates and increased money supply increased consumption of local commodities, thus increasing market for local businesses. Similarly, lower exchange rates discouraged imports because they became relatively expensive while encouraging exports. Therefore, as far as international trade is concerned the monetary policy increased net exports (Kolb, 2010).

Monetary policy is very https://top5writingservices.com/ influential in any economy. As such, it is my opinion that it would be convenient for the FED to use a policy mix, applying both the Keynesian and the monetary theory.

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Keynesian theory states that prices are not flexible downwards while this was disapproved during the 2007 financial crisis, when the prices of houses crashed. Nevertheless, it was discovered that monetary policy alone cannot stimulate the economy, because government spending was vital in stimulating economic growth after the financial crisis (Hall & Lieberman, 2012).

References

Hall, R. E., & Lieberman, M. (2012). Economics: Principles & Applications . Stanford: Cengage Learning.

Kolb, R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future . Hoboken: John Wiley & Sons.

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