Question

What tools did the Fed use to "prop up" or "stimulate" the US economy during and after the 2008 crisis (the great recession). What have been some of the outcomes? How might these actions affected inflation within our economy?

Answer 1

A recession occurs when there is a sharp fall in the aggregate demand in the economy. Fall in the demand causes a fall in the output and a rise in unemployment.

Such a downward fall in the aggregate demand must be countered through the monetary and fiscal policy.

Fed would pursue the expansionary monetary policy to correct the recession:

• Reduction in Federal fund rate.
• Buying securities through the open market operation.
• Reducing the Reserve ratio.

These actions of government or fed led to a rise in the aggregate demand and economy began to recover rapidly.

Inflation would be outcomes of Fed expansionary policy only if economy is already at the full potential level. Expansionary monetary policy would cause the rise in the employment without causing inflation if there is unemployment in economy,