What Big Economics Got Right, Or Wrong, After Crises?

1749 Words Dec 1st, 2014 7 Pages
ECO349 Assignment
Zhouyang Huang

Q1. The article “What Big Economics Got Right, or Wrong, After Crises” discusses the reason that U.S. and U.K. have made better progress compared to Japan and Europe did since the 2007 global financial crisis.

Author John Hilsenrath points out that United States and United Kingdom have taken aggressive monetary policies in order to restore its financial health and appeared to heading the correct direction. By embracing monetary expansion, central banks purchase Government bonds so the supply of money increases. Due to excess supply of money, people buy bonds and in turn raising the prices of bonds. The higher the bond price, the lower the interest rate. With this lower interest rate, firms increase investment expenditures because of lower cost of borrowing, hence creating job opportunities, increasing aggregate demand and promoting economic growth. Graphically, as we can see when the money supply curve shifts to the right, the new money supply curve intercepts with the Money demand curve at lower interest rate. Japan and Europe took a different approach by adopting quantitative easing as typical expansion monetary policy lost effect since interest rate approached zero, Quantitative easing “involves buying long term Treasury bonds and mortgage securities”. Buying long-term Treasury bonds increases the prices of these bonds, therefore lowering long-term interest rates. As…
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