Ample Reserve Framework

Question 1

Ample Reserves Regime

Answer 1

The Feds reduced the ratio to zero percent effective March 26, 2020.
Money Multiplier becomes infinite

Question 2

How does monetary policy work? (Expansionary)

Answer 2

1. The Feds lowers its administered interest rates
2. As interest rates fall, the level of planned investment increases (higher level of income) (ceteris paribus)
3. Increased planned investment fuels macroeconomic growth through the multiplier process
4. Economic growth creates more jobs and pushes unemployment rate down

Question 3

How effective is it?

Answer 3

Works very well in one direction
Housing market, construction, car sales are affected dramatically when interest rates are increased
In a recession, there may be hesitation in investment even if interest rates are lowered
“Pushing on a String” –> thinking lowering interest rates will give the economy some slack.
Tight monetary policy pushes interest rates back up and pushes aggregate demand back in
By raising interest rates the Feds has the ability to reduce aggregate demand
Supply shocks are not easily addressed through monetary policy.