Over the past several years there has been debate over the directions of U.S. fi

Question

Over the past several years there has been debate over the directions of U.S. fiscal and monetary policies. On the one hand, there are looming U.S. debt and deficit issues. On the other hand, there are the low interest rate policies of the Federal Reserve. What are your thoughts on the risks of either changing or not changing course? As part of this, consider that a partial objective of the Fed’s quantitative easing (QE) is aimed at deficit and debt reduction. As U.S. debt continues to expand, what do you envision for the value of the dollar and for inflation?

Explanation / Answer

If the interest rates are increased the supply of money into the economy will reduce as the borrowing will reduce due to higher interest rates, and this in turn will reduce the inflation.This is monetory policy measure.

Quatitative easing is pumping in of money into the economy increasing inflation , this is a fiscal policy measure.

Increase in QE will result in depreciation of dollar as there will be excess dollar in econony.

Increase in interest rate will result in less demand of dollar loans depretiating the currency. Reduction in interest rate will increase growth but also increase inflation, Increase in interest rates will reduce inflation but also reduce growth

So the fedral reserves is using both QE and interest rates to improve growth and expand us economy at the same time keeping inflation under control.

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