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Let?s consider the following scenario:

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Let?s consider the following scenario;In 2001, the Federal Reserve responded to the recessionary conditions in the nation by sharply reducing interest rates and keeping them historically low. This resulted in an increase in the nation?s money supply from ?3.1 percent in 2000 to 8.7 percent in 2001.;In 2004, the Chairman of the Federal Reserve, Alan Greenspan, suggested that lenders ?provide greater mortgage product alternatives to the traditional fixed rate mortgage.? Banks responded by lending billions of dollars to borrowers, using adjustable rate mortgages (ARMs), in which rates fluctuate over the life of the loan and are linked to an economic index, such as United States Treasury securities. These loans were provided to many borrowers who may not have qualified for traditional fixed rate loans, whose monthly initial payments were higher.;In 2005, as the interest rates tied to these ARMs rose and housing prices began to decrease, many people found themselves unable to either pay their monthly mortgage payments or refinance their existing mortgages. Foreclosures rose and housing prices began to steadily decline. As a result, lenders began to restrict their lending practices to avoid further risk and home financing became difficult to secure.;Based on this scenario, what do you believe were the bases for the Fed?s monetary policies in 2001 and 2004, respectively?;Next, discuss the Fed?s policies both in terms of the positive and negative consequences of such policies and in relation to the Keynesian and classical theories. Include in your discussion the effect of such policies on interest rates, GDP, and inflation.

 

Paper#29791 | Written in 18-Jul-2015

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