a. \" The Federal Reserve kept interest rates too low for too long after the rec
ID: 1218175 • Letter: A
Question
a. "The Federal Reserve kept interest rates too low for too long after the recession of 2001; this is what fuelled the property bubble of the mid-2000s in the US." Is this statement true? Discuss.
b. The Federal Reserve cut interest rates dramatically in 2008 in response to the worsening credit crisis. Many emerging market countries were pegged to the dollar at this time. What happened during this period to the emerging economies of countries (most of which were still booming) that peg to the dollar? Is this consistent with what you might expect, given your knowledge of the disadvantage of pegged exchange rate systems as suggested by 'impossible trinity' theory?
Explanation / Answer
a.
This is true.
Fed controls economy through the regulation of interest rates. If the inflation is high, unemployment falls, and wage rates increase, people have enough money in their hands. Interest rates needs to be increased then because of restricting money flow in the market. Years of having lowered interest rates help the citizens accumulating huge funds in their possessions. They used to invest those in fixed property which gives long-term returns. This is the reason of property bubbling in the mid-2000s.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.