since 2009, the federal reserve has been unable to stimulate the US economy suff
ID: 1198865 • Letter: S
Question
since 2009, the federal reserve has been unable to stimulate the US economy sufficiently enough to generate 3-5% annual growth in GDP, despite being short-term interest rates at zero and instituting a massive quanta give easing program. why has monetary policy been unable to do the job? since 2009, the federal reserve has been unable to stimulate the US economy sufficiently enough to generate 3-5% annual growth in GDP, despite being short-term interest rates at zero and instituting a massive quanta give easing program. why has monetary policy been unable to do the job? since 2009, the federal reserve has been unable to stimulate the US economy sufficiently enough to generate 3-5% annual growth in GDP, despite being short-term interest rates at zero and instituting a massive quanta give easing program. why has monetary policy been unable to do the job?Explanation / Answer
This is the classic example of Liquidity Trap.
Monetary policy is completely ineffective if the LM curve is horizontal. The steeper the LM curve, the more effective the monetary policy is because demand for money is less interest sensitive (less elastic). In such case, a small increase (decrease) in money supply causes a large drop (rise) in interest rates. Therefore, a horizontal or very flat LM curve which indicates high interest sensitivity of money demand, signifies that an increase in money supply causes only a small drop in interest rate, which increases investment and boosts aggregate demand by a very less amount. For a horizontal LM curve, no change in money supply can have any impact of interest rate, through which investment or aggregate demand can be stimulated.
So, when an economy reaches the liquidity trap range, monetary policy becomes ineffective. This has happened in case of US.
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