Lecture 14 Flashcards
(8 cards)
Quantitative Easing
Fed purchases toxic MBS by giving banks “reserves” — a liquidity that bank can use to make loans; Buying out the problematic assets to sort out the liquidity problem to prevent banks’ balance sheets from collapsing.
To lower Federal Funds Rate…
Fed must lower interest on reserve balance (main way), lower Discount Window Rate, open market purchase
If reserve requirement was not the real constraint for banks, what is the real limiting factors that make banks not lend?
- Fed pays banks the IORB
- Fed also requires banks to deleverage
What is the price of having safer banks?
A lower income of people as fewer loans are made to high productivity but risky industries
Why did we use IORB as main tool?
Banks receive large reserves as part of QE— These reserves can be made in loan and create large increase in AD
How did Fed stop the banks from lending, thus stopping the money supply creation and massive inflation?
Fed pays the bank to not lend
Did the Red make any loss when it had been doing the QE?
No, it made profit from sorting out the MBS yield
Should the Fed focus more on controlling inflation or lowering unemployment?
In the long-run there is no way to permanently use monetary policy to stimulate the economy. Any attempt to lower unemployment rate would cause accelerating inflation. Therefore, keeping inflation stable is more important.
