Monetary and Fiscal Policy How Does the government keep our country from falling into economic depressions like the 1940’s? In the early 1930’s a man named John Maynard Keynes started an evolution in economic thinking. He challenged the ideas of the free market and argued that aggregate demand determined the overall GDP. He also argued that inadequate aggregate demand could lead to prolonged periods of high unemployment. Keynes proposed the use of fiscal and monetary policies to diminish economic recessions and depressions like the 1940’s. After World War II, nearly all western economies adopted Keynes Policies. Although, his policies were heavily criticized into the 70’s, there weren’t any prolonged periods of high unemployment. He was one of the brightest and most influential economists during this time and was even awarded “Britain’s most famous 20th century economist”, (3).
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The Monetary policy uses “policy tools” to influence economic growth, inflation, exchange rates and unemployment. The Monetary policy is controlled by the Central Bank. In the United States the Central Bank is the Federal Reserve (Fed). The Federal Reserve only has two mandates: stable prices and low unemployment. To meet these mandates the Federal Reserve uses “policy tools”. The theory is that by encouraging businesses and individuals to spend, with the use of policy tools, you can prevent an inflation or recession. One of the policy tools in monetary policy is interest rates. An interest rate is the cost of borrowing money. The central bank can manipulate interest rates to make it harder or easier to buy money, (1). If interest rates are low then there are usually more borrowing and economic activity increases. Lower interest rates may also influence someone to borrow more money. Vice versa. If Interest rates are high people will borrow less meaning economic activity will decrease. The graph is credited to
The Monetary policy uses “policy tools” to influence economic growth, inflation, exchange rates and unemployment. The Monetary policy is controlled by the Central Bank. In the United States the Central Bank is the Federal Reserve (Fed). The Federal Reserve only has two mandates: stable prices and low unemployment. To meet these mandates the Federal Reserve uses “policy tools”. The theory is that by encouraging businesses and individuals to spend, with the use of policy tools, you can prevent an inflation or recession. One of the policy tools in monetary policy is interest rates. An interest rate is the cost of borrowing money. The central bank can manipulate interest rates to make it harder or easier to buy money, (1). If interest rates are low then there are usually more borrowing and economic activity increases. Lower interest rates may also influence someone to borrow more money. Vice versa. If Interest rates are high people will borrow less meaning economic activity will decrease. The graph is credited to