1) The intention of the Federal Reserve when they were buying large quantities o
ID: 1163792 • Letter: 1
Question
1) The intention of the Federal Reserve when they were buying large quantities of securities from 2008 to 2014 was to lower long-term interest rates. This would support the housing market. True or False? 2) In response to the financial crisis of 2008-2009 the Federal Reserve dramatically expanded its balance sheet (less than $1 trillion in December of 007 to about $4.5 trillion in December of 2016.). True or False? 3)The growth of M1 during the period from 2008 to 2014 was highly positively correlated with the growth in reserves generated by Fed asset purchases. True or False?
Explanation / Answer
1) TRUE
FROM AN OPEN SOURCE:
On March 16, 2010, the Federal Open Market Committee issued a press release stating: “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month.”
2) TRUE:
MONETARY POLICY AND
THE STATE OF THE ECONOMY
Wednesday, July 12, 2017
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
3) FALSE :
The period of recent financial crisis is a good example of a large deleveraging in the economy,
during which stock prices also fell. During this period the multiplier experienced a large drop
related to the enormous growth of excess banks reserves at FED. The latter resulted from the
FED asset purchase programs triggered by the Lehman collapse. The same event also led to a
drop in stock market prices. However, further deleveraging of financial institutions exacerbated
market downturn following the mechanism described by Brunnermeier and Pedersen (2009).?
[NOTE : ANSWER TO THE ABOVE QUESTIONS ARE GIVEN ON THE BASIS OF FACTS]
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