The Banking System and Recessions By increasing the money supply, the Federal Re
ID: 1210600 • Letter: T
Question
The Banking System and Recessions By increasing the money supply, the Federal Reserve can lower interest rates. This has a broad impact on the economy as mortgages, business loans, etc. can be obtained less expensively. Some economists believe that the money supply increases contributed to a housing bubble and the subsequent housing market crisis of 2008-09. They suggest that this event is an example of how the Fed can create recessions by artificially encouraging bad investment decisions, and that the same pattern can be seen in the tech stock bubble of the late 1990s and other recessions even as far back as the Great Depression.
Evaluate this view of the cause of recessions. Do you agree or disagree? Why?
Explanation / Answer
It is a view of the cause of recession because it created increase in the rate of interest which decreased the scope of emploment and reduced wages of the workers. The spendings have been reduced due to hike in the market. It also adversely affected the demand and supply of the product in the market.
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