Following the “great recession†of 2008-09, the central bank had used all of its traditional tools to try to stimulate the economy. Interest rates were at historic lows, but the economy still needed more help.
The Fed then embarked on a new strategy, one it had never used before called “quantitative easing.†Basically The Fed credited its electronic bank account with new money (the modern version of printing money), then used the money to buy financial assets. The idea was that this “new money†would be pushed into the economy, thereby increasing the amount of money banks had on hand, which would hopefully result in more lending and therefore economic activity.
Many economists were concerned that this increase in the number of dollars circulating would result in inflation, in accordance with the implications of the quantity equation/ quantity theory of money (from the end of chapter 14).
Essentially, the Fed made a decision on behalf of our society to pursue economic growth at the risk of causing inflation. With this in mind, please respond to the following:
- Is this a good trade-off? Why or why not? Please use economic reasoning (marginal analysis) in your explanation, and support your position with online research. In your response, please include a link to at least one article or website supporting your position that passes the CRAAP Test (Links to an external site.).
- Should The Fed have the authority to make these trade-offs on behalf of our society? Recall that the Fed presidents are not elected by the citizens, they political appointees. Considering citizens’ general knowledge of economics, and how crucial the economy is to our well-being, would you prefer a system where voters ran the economy?
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