Keynesian Fiscal Policy vs. Monetary Policy
In the early 21st century, here in the USA:
An efficient, "full employment" economy will probably have:
1. Annual unemployment rate 4-5%
2. Annual inflation rate 2-3%
If the economy goes into a recession:
3.The real GDP decreases for at least 6 months
4. Unemployment rate increases to 6% or more
5. Inflation rate decreases to 2% or less
If Congress enacts Keynesian Fiscal Policies to attempt to slow/stop the recession, then:
6. The policy will try to improve C or G (parts of AD)
7. Congress will cut federal taxes
8. Congress will increase job and spending programs
9. The federal budget will probably create a deficit
10. Due to changes in Money Demand, interest rates will increase (Crowding out might occur, but Keynesian's don't care)
If the Federal Reserve employs Monetary Policy options to slow/stop the recession, then:
11. The policy will target improvement in Ig (part of AD)
12. The Fed will target a lower Fed Fund Rate
13. The Fed can lower the discount rate
14. The Fed can buy bonds (Open Market Operations)
15. The Fed can (theoretically) lower the reserve requirement, but probably won't because it is too complex for the banks.
16. These Fed policies will lower the interest rates through changes in the Money Supply
17. These options should increase Ig
If the economy suffers from too much demand-pull inflation or cost-push inflation, then:
18. The unemployment rate will go to 4% or less
19. The inflation rate will probably go to 4% or more
If Congress enacts Keynesian Fiscal Policies to attempt to slow/stop the inflation problems, then:
20. The policy will try to decrease C or G (parts of AD)
21. Congress will increase federal taxes
22. Congress will decrease job and spending programs
23. The federal budget will probably create a surplus
24. Due to changes in Money Demand, interest rates will decrease
If the Federal Reserve employs Monetary Policy options to slow/stop the inflation problems, then:
25. The policy will target decreases in Ig (part of AD)
26. The Fed will target a increased Fed Fund Rate
27. The Fed can increase the discount rate
28. The Fed can sell bonds (Open Market Operations)
29. The Fed can (theoretically) raise the reserve requirement, but probably won't because it is too complex for banks
30. These Fed policies will decrease the interest rates through changes in the Money Supply
31. These options should decrease Ig
Quick fact: Monetary policy decisions are made by the Federal Open Market Committee. This committee is made up of a Board of Governors, the presidents of four of the 12 Federal Reserve Banks, and the president of the Federal Reserve Bank of New York.
ReplyDeleteI would like to add that the crowding out effect occurs when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending.
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