Macroeconomics Case

Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.

The central bank performs monetary policy-the decisions and actions for managing the supply and growth rate of money in the country. The central banks have the power to put more money into the system when the economy is struggling and the power to reduce the amount of money in the system when the economy is growing. Because the central bank has this power to expand or loosen the money supply, it affects the countries interest rates, unemployment, and inflation.

What did the central banks do to stabilize the financial systems in 2007-2009?

They inflated prices in the stock and housing markets through the monetary policy. The Federal Reserve aggressively lowered interest rates and prepared a series of fiscal stimulus measures. Tax rebate checks were mailed to lower and middle-income households in 2008, The American Recovery and Reinvestment Act (ARRA) was passed in early 2009; and several smaller stimulus measures became law in late 2009 and early 2010.

In an effort to stabilize the financial system, how much money, in U.S. dollar equivalent and as a percentage of the country's GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009?

The Federal Reserve injected $233 billion dollars into the financial system. The European Central Bank managed to inject $90 billion dollars with the aim of selecting a particular sum of finances capable of operating the financial systems, but not too much to control the developments of currency markets. Lastly, the Bank of China injected $9 billion dollars during the last week following the addition of $6 billion the previous week. There was a 3.4% decline in GDP over the life of the great recession, the most since WWII. There was a decline in GDP of about 6% annually, and monthly job losses averaged close to 750,000 a day (Blinder, July 2010). Close to $1 trillion or 7% of GDP was spent on fiscal stimulus measures.

How well did each country's efforts work at stabilizing the economy?

Each country had hurdles, but all of their efforts contributed to improving and stabilizing the economy. Without their prompt and efficient attention to this, the economy would not be on its way to improvement today.

What appears to be the major constraint that the central banks used to determine the limits of the monetary injections into the economy? Did the United States use the same or different criteria?

The major constraint central banks used to determine the limits of injections was the control of the interest rates. Even though they were being lowered, there was still so much control over