Question

Question three Examine the spillover effect between the signaling and portfolio balance channel. (20 points) Question four Why are long-term interest rates so low? Do you agree with Ben S. Bernanke's explanation? (20 points)

Answer 1

Spill over effect is the impact which seemingly unrelated the events in a nation that can have on other economies. It purposes the engaging of the economy in one behaviour which affects the probability of the engagement and disengaging of the second behaviour.

Signalling is the idea which one party or agent conveys some self information to the another party or the principal.

Whereas, the portfolio balance channel holds the situation when once short term interest rates reaches zero, the purchases of the Federal Reserve of longer term securities affects the financial condition.

The spill over effect between signalling and portfolio balance channel affects the domestic factors of the economy like, inflation and exchange rate. The transmission mechanism becomes useful for the portfolio balance channel when the knowledge of spill over return effect becomes useful for asset allocation in the economy. As a result of which the Federal reserve purchases the securities of long term and the other economy gets to know about the financial status of the economy.

The interest are considered to be the market prices, i.e., it is the function of supply and demand of the bonds. There is plenty of supply of debt and the bonds are there to sell to pay them off but its not enough to satisfy the demand for the debts at the greater interest rates. Therefore. the interest rates are kept so low for so that the debts can be payed off easily.

Ben Bernanke was successful in stimulating the economy of U.S. after 2008 banking crisis which sent the economy in a downward spiral. He took the experimental and aggressive approach to restore the confidence of the financial system. It was not at all beneficiary for the economy as it lead the economy in more severe situations.