Questions On Economics

1. By lowering the Federal Funds Rate the Fed is pumping more money into the economy to force stabilization. The Fed lowers the interest rate at which the banks trade balances. The banks, then have more money to loan out at a lower interest rate. So in theory, there will be more loans given and consumers will spend those loans, pushing money into the economy and lifting us out of the recession. However, this is all theory and did not happen in the magnitude they thought it was going to. In the past we have learned that stabilization may not be the perfect answer but it definitely reduces the amplitude of the cycles of recessions.
The Fed may have contributed to the recent recession because consumers did not spend the money as the Fed had hoped; instead they saved it and/or didn’t spend it quickly enough. The Fed cannot, precisely, control the economy through manipulation of the money supply because policy lags. The data is not trustworthy because it takes approximately two years for the data to reflect what was happening in the economy. The data analysis is vague due to the untrustworthy numbers, the amount of time the implementation takes and how long the impact takes time to reach the economy and make a difference. It is possible that in the amount of time the manipulation took to take effect, the economy may have sorted itself out on its own. The question is how long does one want to wait to get out of the recession? The fed, obviously think they can speed up the process and that quicker is better.
2. Long term growth is what the economy does over time in terms of production. The sources of long term growth are labor, capital goods, resources and the technology by which the previous are combined.
When the baby boomers retire, we see a decrease in the amount of workers, so a rise in wages to compete for the smaller workforce. Also we’ll see a decrease in output; an increase in prices thus raising inflation.

An anti-trust regulation ensures no company obtains a monopoly on a market ensuring competitive prices in the economy. So the policy helps keep the prices down and increase the output of capital goods, this shifts the long run aggregate supply to the right.
The intellectual property protection policy encourages new technologies that will increase the labor force which will also shift the long run aggregate supply to the right by increasing the output of our economy.

3. There were many contributors of the recent boom-bust cycle in the housing marker. Consumer behavior, market conditions, and economic factors all played there part in this perfect storm.
A main contributor was the fed’s deregulation of the banking industry that allowed banks to increase the number of subprime loans it gave out. The Community Reinvestment Act forced banks to lower their standards of giving out loans, in order to get lower income families into homes. They were now giving loans to people who could not repay them and banks were allowing lots of people with little money own homes.
Banks and mortgage companies could now sell their subprime loans to the government thus not having to shoulder the burden of a bad loan, and enticing them to give out more subprime loans. Fannie Mae and Freddie Mac, being backed by the federal government, were happy to take on the risk of these subprime loans, as they surely were not going to be held accountable for the money. There was also a boost in technology that allowed people to shop for the best mortgage. The internet made it a more competitive market, in that banks were competing to give out more subprime loans due to the tertiary market in mortgage companies.
Over a decade there were numerous de facto deregulations that took place that also contributed to the housing price bubble. The repeal of the Glass-Steagall Act, allowed the merger of banks, insurance companies and stock brokers. Deregulation of this act followed by desupervision of the remaining portion

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