Since the end of the Great Recession, interest rates have been at historic lows—in some cases, close to zero. How is expansionary monetary policy, or more specifically a open market purchase, supposed to work? How do near-zero interest rates limit the ability of expansionary monetary policy to work?How has the Fed responded to this quandary? That is, what policies has the Fed conducted?how effective has the Fed’s policy been as a response to the Great Recession?

The dramatic decrease in economic activity in the late 2000s was known as the Great Recession. One could argue that it is the deepest recession since the 1930s. To describe both the U.S. recession of December 2007 to June 2009 and the worldwide recession of 2009, the term "Great Recession" is used. When the housing market in the United States transitioned from boom to bust, large sums of mortgage-backed securities (MBS) and derivatives lost significant value, the economic depression began. IMPORTANT THINGS TO KNOW. To describe the economic slowdown that occurred between 2007 and 2009, the term "Great Recession" is used. This recession was the worst since the Great Depression of the 1930s in the United States. Federal authorities responded to the Great Recession by enacting fiscal, monetary, and regulatory policies never before seen, which some attribute to the subsequent recovery, but not all. The Great Recession: A Comprehensive Overview There is a resemblance between the term "Great Recession" and "Great Depression." The latter occurred in the 1930s and had a GDP fall of more than 10% and an unemployment rate that at one time approached 25%. Economic experts agree that the late-2000s downturn, which saw GDP fall 0.3% in 2008 and 2.8% in 2009, did not meet the requirements for depression, even though there are no specific criteria for distinguishing depressions from severe recessions. Although the decline is certainly the greatest in the intervening years, Great recession's root causes In 2011, the Financial Crisis Inquiry Commission concluded that the Great Recession may have been avoided. The appointments, which included six Democrats and four Republicans, pointed to several causes they believe contributed to the slump. The government's failure to control the financial sector was first identified in the report. The Fed's unwillingness to curtail risky mortgage lending was one example of this failure to regulate. In addition, an excessive number of financial institutions took on an excessive amount of risk. Even though investment businesses expanded to match the depository banking system in size, they were not subject to the same scrutiny or regulation as depository banks. After shadow banking collapsed, people and businesses lost access to loans. Excessive borrowing by individuals and businesses and incompetent policymakers were cited as contributing factors in the study. The Causes and Consequences of the Great Recession As a result of the 2001 recession and the September 11, 2001, terrorist attacks, the U.S. Federal Reserve lowered interest rates to the lowest levels ever recorded in the post-Bretton Woods era. In mid-2004, the Federal Reserve kept interest rates low. Low-interest rates, along with federal policies aimed at encouraging homeownership, contributed to a rapid rise in the value of the real estate and financial markets, as well as a significant increase in the overall amount of mortgage debt. Financial innovations like new subprime and adjustable mortgages permitted borrowers who would not have qualified otherwise to acquire generous home loans based on the belief that interest rates will remain low and property prices continue to grow indefinitely. However, the Federal Reserve slowly raised interest rates from 2004 to 2006 to keep the economy's inflation rates constant. As a result, market interest rates climbed, reducing the amount of new credit flowing into the real estate market via traditional banking channels. Moreover, the rates on existing adjustable mortgages and more exotic loans began to reset at significantly higher rates than many borrowers expected or were encouraged to expect. As a result, a housing bubble that was later widely acknowledged burst. Mortgage-backed securities and complex derivative instruments were being sold at unprecedented levels during the American housing boom of the mid-2000s. The value of these assets plummeted when the housing market collapsed in 2007. As the 2007 credit crisis began to unravel, the credit markets that had fueled the housing bubble began to decline as well. Bear Stearns' failure in March 2008 was a tipping point for the solvency of other heavily indebted banking organizations. As the virus swept over the globe, particularly in Europe, it swiftly spread to other economies. In September 2008, the fourth-largest investment bank in the United States, Lehman Brothers, went insolvent. According to the U.S. Bureau of Labor Statistics, the Great Recession resulted in losing 8.7 million jobs in the United States alone, forcing the unemployment rate to double. According to the U.S. Department of the Treasury, American families lost $19 trillion in net value due to the stock market collapse. The official end date of the Great Recession was June 2009. Predatory lending became illegal under President Barack Obama's Dodd-Frank Act of 2010, which granted the government control over failing financial institutions. To Respond To The Financial Crisis Of 2008-2009 It is widely accepted that monetary policies implemented by the Federal Reserve and other central banks in response to the Great Recession were instrumental in keeping the global economy from collapsing further. However, these policies have also been accused of lengthening the overall recovery time and paving the way for future recessions. Fiscal and Monetary Policy The Federal Reserve, for example, cut a key interest rate to practically zero and supplied banks with a whopping $7.7 trillion of emergency loans in a policy known as quantitative easing. In some ways, this enormous monetary policy reaction reflected a repetition of the monetary expansion in the early 2000s that initially sparked the housing bubble. According to the Congressional Budget Office, a huge fiscal policy package accompanied federal Reserve liquidity injections to boost the economy, with the American Recovery and Reinvestment Act's deficit expenditure amounting to $787 billion. Even if the immediate losses to huge financial institutions and businesses were lessened as a result of these monetary and fiscal policies, they also prevented the economy from moving away from many of the economic and organizational structures that contributed to the crisis.REQUIRED ANSWER The interest rate will decline due to an increase in the money supply in the market. Low-interest rates encourage businesses to invest and consumers to spend more, bringing the economy out of recession. Any increase in the money supply or open market operation will not alter the demand when the interest rate is zero. The economy is in a liquidity trap because it can't go any farther. Specifics of the case Economic growth is encouraged by keeping interest rates low so that consumers have less incentive to save and instead spend their money. There is an increase in market liquidity, and the forces of supply and demand remain strong due to this. The Federal Reserve typically grows business during an economic crisis by improving market fluidity. This is done by lowering the reserve requirements for banks, which causes banks to have more money on hand, allowing them to lend it out, or by strategies such as lowering interest rates for banks, which in turn lowers public interest rates, again supporting them. However, the Federal Reserve takes Open Market Purchases when it directly buys bonds from the market. With this transaction, the money is moved directly from the Federal Reserves to the people selling their bonds, which increases the flow of money in the economy. This boosts the economy's money supply, which positively affects both demand and supply. Interest Rates at Zero: - A country's economy can no longer create money by lowering interest rates any further when they are all at zero. During a recession, interest rate reductions encourage individuals to spend more money and buy more goods and services. The Federal Reserve can't use interest rates as a policy tool when they are already at zero.