HW4B_Answers_ECON102-Fall2014 - ECON102 N Aman HW4B...

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ECON102 N. Aman HW4B: Suggested Answers in Blue 1) On October 29, 2014, the members of the Federal Open Market Committee (FOMC) of the Federal Reserve Board voted to maintain its federal fund target within the same range of 0.25% basis points and 0% percent, as it was set by the FOMC back in August 2011. But in 2011, the economy was in severe recession and the purpose was to boost the economy by increasing liquidity in the banking system at this low rate when the inflation was also very low. The specific action of the Fed trade was to purchase treasury securities every day to increase the money supply and thus keep the interest rate (the federal fund rate) low to stimulate the economy. But in October 2014, the economy has shown to its near full recovery and stock market and financial institutions are performing very well since 2011. On October 29, 2014, the FOMC also decided to end the asset purchase plans under Quantitative Easing (QE III) under which the Fed had been buying mortgage backed securities and LT Treasury Bonds since the recovery started in 2011. Upon this decision to end the QE III of asset purchase and keeping the same federal fund rate target, the Dow Jones Industrial Average Price gone down significantly and did not fully recover by the end of the trading day. Question: What are the macroeconomic trends that did prompt the FOMC to end the QE III but to keep the federal fund rate still at its historic low? You need to give reasons for both of these policy measures. For more information, please visit the press release of FRB in the url link here. Also, read some newswire analysis here on cnn portal on the same day. - buying/index.html?iid=HP_LN Suggested Answers: The key factors that prompted the Fed are mainly the signs of economic recovery reflected in sustained RGDP growth rate for the last 3 years, continuous decline of unemployment rate reaching to almost at NAIRU level, sustained rise in stock prices, low inflation and interest rates, increasing consumer confidence, recovery of housing market, and other related economic indicators. The policy makers at the Fed felt that at this point of state of the economy close to its full employment, continuation of QE III as the

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