Extended Essays 2021

1.0 Introduction

In early March of 2020, the coronavirus spread worldwide (Pereira & Mitropoulos, 2021).

The U.S. economy also fell into a severe recession, which led to market panic and increased

negative externalities. In the second quarter of 2020, the annual GDP rate of the United States

is -32.9% (Davidson, 2020).

In addition, according to the U.S. government statistic (United States Department of Labor,

2021), the unemployment rate remained at a high level of over 10.2% as of July.

In response, the Federal Reserve launched several expansionary monetary policy programs to

increase consumption and reduce unemployment (Alpert, 2021). The objective of

expansionary monetary policy is to increase national income and employment by lowering

interest rates or money supply to minimize the deflation gap by increasing AD. Aggregate

demand (AD) is the total spending on goods and services in a period of time at a given price

level, which can be expressed as formula AD = C + I + G + (X - M).

On 15 March 2020, the Federal Reserve said it would buy at least $500 billion of U.S.

treasury bonds and $200 billion of government-guaranteed mortgage-backed securities in the

coming months (Cheng, et al., 2021), whereas the treasury bonds refer to the amount owed by

the U.S. federal government to the holders (Australian Office of Financial Management,

n.d.). Moreover, Mortgage-backed securities (MBS) are investments that consist of securities

from home loans purchased from banks (KAGAN, 2021).

From March 2020 to December, the Federal Reserve's securities portfolio increased directly

from $3 trillion and $900 billion to $6 trillion and 600 billion (Cheng, et al., 2021). A

p ortfolio of securities refers to the investment portfolio formed by investors’ choice of

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