Using FRED codes answer the question Define and explain the

Using FRED codes, answer the question:

Define and explain the broader financial system failure in economic terms. What is a liquidity trap? What is quantitative easing? What evidence is there about a “Run on the Banks” during the Great Recession?

Solution

In economic terms, the financial system helps finance long-term policy goals. In other words, it is defined as a market where securities like equities, bonds are traded. A financial system failure occurs when a financial intermediary like a bank loses a major part of its nominal value. Situations which are called financial failures are stock market crash, currency crises or bursting of financial bubble etc.

Liquidity trap is a situation defined by Keynes as when the rate of interest falls to a certain threshold, people prefer to hold more cash rather than debts or their liquidity preference is visually absolute and implies that people start withdrawing their money from the banks.

Quantitative easing is a monetary policy which is unconventionally affecting money supply. It is a massive expansion of open market operation where central bank purchases government bonds from the market to reduce interest rates and increase the money supply. It is used to stimulate the economy and increase liquidity in the economy.