COVID-19 & Monetary Policy
Which president refused to raise interest rates during COVID-19?
Donald Trump
What influence does the UMP, Foward Guidance (FG) have on investors?
Market Stability & Confidence
What does the VIX index measure?
Investor fear and market volatility
What did the Federal Reserve do in response to the 2008 crisis?
Cut interest rates to near zero and introduced QE into the economy.
What does UMP stand for?
Unconventional Monetary Policy
What action did the Fed take in response to COVID-19?
Slashed interest rates to zero and launched the largest QE policy ever.
How did the Fed and BoC react when inflation surged in 2021?
They rapidly raised interest rates, reversing their previous policies.
How did the VIX influence central bank decisions?
When it spikes, central banks often lower interest rates to calm the markets.
What was the biggest consequence of the UMP usage post-2008?
It created long-term dependence on central bank intervention.
Why is UMP used instead of traditional monetary policies?
Because traditional interest rate adjustments are not enough during extreme crises.
How did the BoC’s approach change in 2020 compared to 2008?
It used QE for the first time in 2020 but delayed using in their response in 2008.
What is R* and what's the purpose?
R is the neutral interest rate that keeps the economy stable. If miscalculated, inflation becomes harder to control.
How did the dot-com crash impact future economic policy?
It led to asset inflation policies that contributed to the 2008 financial crisis.
What did the Bank of Canada do during the 2008?
Its banking system was stronger, so it relied on liquidity provisions instead.
Name the two main types of UMP used by the BoC and the FED.
Quantitative Easing (QE) and Forward Guidance (FG)
What mistake did the Fed make in 2021 regarding inflation?
They assumed inflation was temporary due to supply chain issues and didn’t act fast enough.
Why did UMP fail to stop inflation in 2021?
Because it increased demand at a time when supply was already limited, worsening inflation
What was the biggest issue with inflation expectations in 2022?
People expected inflation to continue, so they adjusted wages and prices, making inflation worse.
How did the 2008 crisis set the stage for future inflation problems?
It led to a reliance on low interest rates and QE, making it harder to control inflation later.
What was the goal of UMP?
To prevent recessions and stabilize financial markets.
What was the key difference between 2008 and 2020 in terms of economic disruption?
2008 was an Aggregate Demand shock, while 2020 was a Short-Run Aggregate Supply shock.
What economic term describes high inflation and no economic growth?
Stagflation
What issue in the 1970s, spiked inflation rates ultimately leading to the creation of inflation targeting?
The OPEC Crisis
What was the "Taper Tantrum" of 2013?
When the Fed announced it would slow down QE, markets panicked, fearing higher interest rates.
What major risk does long-term UMP create?
Markets become too dependent on central banks, leading to instability when policies reverse.