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ID: 1199563 • Letter: 2
Question
2.. Navigate to the threaded discussion below page and respond to the following:
Before beginning the assignment, read Chapter 14, “The Aggregate Model of the Macro Economy” in the ECON-511 textbook, Economics for Managers.
Find one or more articles in the Wall Street Journal or another business publication that describe fiscal and monetary policies in the United States (include links with your posting).
Discuss how these policies relate to the model of aggregate demand and aggregate supply and issues involved with implementing these policies.
Use examples and plots with your posting where appropriate.
Use sub-headings to organize your response.
At the bottom of your posting, cite any references which you use.
Explanation / Answer
After the sub-prime crisis and related recession, the US has been pursuing an unconventional monetary policy of asset purchase and close to zero interest rates (quantitative easing). However, now the Fed is poised at abandoning the unconventional policy measures and get back on track of the conventional monetary policy tools.
Growth in employment, coupled with inflation at a steady level of 2%, the US monetary policy will be a little more tighter than before, which will be achieved by a contractionary monetary policy by increasing interest rates: what is being termed as "Normalization" of interest rates.
This policy will reduce the growth in money supply in the economy, which will lower aggregate demand. In the AD-AS model, AD curve will shift leftward at a higher price level and lower output. In the short run, AS curve will remain unchanged.
On the other hand, fiscal policy aims at changing aggregate demand through change in government spending and/or tax rate. Since the recession, the fiscal policy aims at increasing government spending to stimulate aggregate demand. This has the effect of increasing aggregate demand, thus shifting the AD curve rightward, intersecting aggregate supply curves at a higher price and higher output. In the short run, aggregate supply remains unchanged.
[Source:
1. Monetary policy: https://www.newyorkfed.org/newsevents/speeches/2015/dud150420
2: Monetary policy: http://www.brookings.edu/research/speeches/2015/01/30-us-monetary-policy-global-economy-kohn
3. Fiscal Policy: https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-economic-trends/et-20150714-us-fiscal-policy-recent-trends-in-historical-context.aspx
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