It was implemented by Treasury Secretary Henry Paulson. It consisted on a bailout to ensure the viability of the US financial system after the subprime mortgage crisis because massive defautls had already triggered the collapse of the investment bank Lehman Brothers. $700 billion were directed to purchase mortgage-based securities and other potentially dangerous assets, injecting liquidity to banks.
Authorities are undertaking an interventionist stance in order to reverse the critical economic situation. Recession was faced by pumping public money into the system hence, by increasing public spending, aiming that it would subsequently lead to demand increases. Such solutions are therefore based on Keynesian economics, as it was the New Deal implemented by President Roosevelt in the 1930s.
It is one of the actions that have been performed by the Fed since 2008. It is an expansionary monetary policty that consists on large asset purchases that would decrease interest rates and, in turn, boost public and private investments, consumption and, in general, the whole aggregate demand.
Answer:
Me: Today, we have with us John Williams, a member of the Board of Governors of the Federal Reserve. Mr. Williams, thank you for joining us.
Williams: My pleasure.
Me: Governor Williams, following the recent economic meltdown, what is the most important factor that the Fed is trying to improve?
Williams: Household expenditures.
Me: How are you going to increase expenditures?
Williams: The Fed has reduced the federal funds rate on loans from 8.5% to 5.75%. The lower rate should encourage people to borrow money so they can buy more.
Me: What strategy are you going to adopt to reduce unemployment?
Williams: We are going to implement an expansionary monetary policy. Lowering interest rates encourages people to buy more goods. Because of the increased demand for goods, entrepreneurs will eventually hire more workers to meet consumer demand.
Me: What other benefits can we expect from this expansionary policy?
Williams: Well, our currency exchange rate will fall, which will help increase exports and reduce imports. Increased foreign demand is a huge incentive for producers of various goods because it increases aggregate demand. However, because of increased import costs, there will also be slight inflation.
Me: So what about price stability, considering it’s an important monetary policy goal?
Williams: Once we have achieved the expected results from the expansionary monetary policy, we will slowly start implementing contractionary monetary policy so prices are stable and inflation is low.
Me: Mr. Williams, thank you so much for taking the time to answer some of our questions.
Williams: You’re welcome.
Explanation:
PLATO/ EDMENTUM
