After you have studied Economics in the News on pp. 652653, answer the following questions. a. What
Question:
After you have studied Economics in the News on pp. 652–653, answer the following questions.
a. What changes in the Fed’s assets occurred between 2006 and 2021?
b. How did M2 and its velocity of circulation change between 2006 and 2021?
c. How does the nominal interest rate influence the velocity of circulation and why?
Transcribed Image Text:
Quantitative easing, QE, is an open market operation that increases the size of the Fed's balance sheet. The Fed's assets increase by the amount of the securities it purchases, and its liabilities increase by the bank reserves and monetary base it creates to pay for the securities. The Fed started QE operations in the Great Recession in 2008 and followed that with two further rounds in 2010 and 2012. These episodes were known as QE1, QE2, and QE3. The Covid QE operation that started in March 2020 was on a much larger scale that the three earlier ones. Figure 1 shows the Fed's assets since 2006 and the years through 2007 show the Fed in pre-crisis normal times with assets (and matching monetary base liabilities) of around $600 billion ($0.6 trillion). 8 7 6 Federal Reserve assets (trillions of dollars) N 5 A 3 QE1 QE2 2010 QE3 Total securities Covid QE U.S. Treasury securities 2006 Year Figure 1 The Federal Reserve's Assets 2014 2018 2022
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