5. Based on the historical experience of US economic policy, it is observed that

Question

5.         Based on the historical experience of US economic policy, it is observed that whenever Congress decides to increase the rate of government spending, gross private investment (or private capital expenditure) spending tends to decrease. I must add that the same policy result is being observed in China.

a)      Does the current economic situation reflect the historical experience? Please explain why capital expenditure decreases

b)      What has the Fed done to reverse the decrease in private capital expenditure? Has the Fed been successful?

Explanation / Answer

Because gross private investment decreases,the government has to increase spending to upset the decline.Otherwise,the economy will go deeply in deflation and very hard to get out of it.

a. The opportunity to make the profits declines,that is called recession or depression.Private investors will stop investing.That's why capital expenditure decreases.

b. The FED reduces the fund rate called monetary policy. It was successful in 2008.But in 1930s, it used the tight money policy,it was a failure.

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