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Remedies For The Great Recession

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Monetary Policies as Remedies for the Great Recession:
An Analysis on the Effectiveness, Rationale and Criteria
In the year 2008, the burst of housing bubbles began to occur in the North American real estate market along with the Great Recession which swept through most countries around the globe, leading to disastrous impacts on the global economy including dramatic growth of unemployment, collapse of the financial markets, political instability and many other concerning outcomes. These alarming economic downturns drew the attention of economists and government authorities to the implementation of effective remedies for the crisis. Effective and practical solutions were urgently demanded in order to stimulate consumption without significant …show more content…

In theory, when the central bank increases money supply, increase rates will drop and investments will rise due to the falling return on interest-bearing savings. The increase in investments will push up aggregate expenditure, resulting in a greater equilibrium output level, followed by an excess supply in the goods market. The larger output will motivate money demand, which will place an upward pressure on the interest rates, and hence will cause the aggregate expenditure to fall back down. However, the overall impact of an expansionary monetary policy should provide a higher equilibrium income and lower interest rates. So far, this seems like a perfect strategy to stimulate aggregate demand and resume economic activities. According to Okun’s Law, unemployment rate will fall by 1 percentage point during each year that the growth rate of GDP exceeds the growth rate of potential output by 2 percentage points (Fawley, Juvenal, 2010). The demand side of the labor market will also increase, since a decrease in real interest rates affects the cost of capital, which influences capital accumulation and the demand for labor. (Blanchard, 2003). In practice, the Federal Reserve System in the US implemented monetary intervention since September 2008. Firstly, it increased money supply by printing money, which aggressively moved the interest rate to almost zero. Then in December 2008, the Fed adopted a strategy known as “quantitative easing”, which involves massive purchases of government bonds by the central bank. These loans to the government further improved money supply. So the question arises: The national unemployment rate of the U.S. was 5.0% in December 2007, and the figure increased to 10.0% in October 2009 (Bullard, 2010). Although there is not enough evidence for us to claim that the expansionary

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