The article starts out by saying the Fed tried to upstart the economy by reducing interest rates, and it was unsuccessful to jumpstart the economy. A reduction in the interest rate, is an expansionary monetary policy. Meaning it is a policy the Fed uses to increase the money supply in the economy. This policy affects many markets, the first market being the money market. A shift to the right of the money supply line in the money market will decrease the interest rate, since money demand is downward sloping and money supply is vertical (Graph 1). After this decrease in the interest rate, the planned investment of business will increase (Graph 2). This happens because a business can now borrow the money to build a new factory for example at
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This action is defined as expansionary fiscal policy, the government as two tools to affect the economy government spending and taxes. In this case the government used both, increasing spending and reducing taxes. This has an immediate effect on output (Y) in the goods and services market. Increasing Y substantially, consequently the increase in Y causes an increase in money demand in the money market. Money demand and the interest rate are directly correlated so the interest rate goes up also. As previously discussed, the interest rate increases causes business to decrease their investments because it costs more for them to borrow the money to expand their business. This decrease in investment affects output negatively, bringing it back down though not as much because this effect is secondary. The secondary effect for fiscal policy is known as the crowding-out effect, the tendency for increases in government spending to cause reductions in private investment spending. In this case the crowding-out effect was great due to large sensitivity in the interest …show more content…
This has to do with time lags, which we discussed in class during chapter 15. He says this is due to the long time it takes for Congress to pass a bill to get the economy out of recession. And in this time it takes, the economy has already started to recover so the need for expansionary fiscal policy is not there. Because if deployed while the economy is recovering, it can lead to too much rapid expansion in a short period of time. This lag Feldstein is talking about is called implementation lag. During the lectures, Professor Petry defined implementation lag as the time it takes to put the desired policy into effect once economists and policy makers recognize the economy is in a boom or a slump. Professor Petry also noted that the implementation lag for fiscal policy is always much greater than for monetary policy. Thus, the statement from Feldstein is consistent with what we have learned in Econ 103. Though the government did utilize fiscal policy in the great recession. This can be explained because the government realized the economy would not be coming out of the recession anytime soon, so they went ahead and implemented the policy. The risk for mistiming the policy was so small, they could take the chance on
This action is defined as expansionary fiscal policy, the government as two tools to affect the economy government spending and taxes. In this case the government used both, increasing spending and reducing taxes. This has an immediate effect on output (Y) in the goods and services market. Increasing Y substantially, consequently the increase in Y causes an increase in money demand in the money market. Money demand and the interest rate are directly correlated so the interest rate goes up also. As previously discussed, the interest rate increases causes business to decrease their investments because it costs more for them to borrow the money to expand their business. This decrease in investment affects output negatively, bringing it back down though not as much because this effect is secondary. The secondary effect for fiscal policy is known as the crowding-out effect, the tendency for increases in government spending to cause reductions in private investment spending. In this case the crowding-out effect was great due to large sensitivity in the interest …show more content…
This has to do with time lags, which we discussed in class during chapter 15. He says this is due to the long time it takes for Congress to pass a bill to get the economy out of recession. And in this time it takes, the economy has already started to recover so the need for expansionary fiscal policy is not there. Because if deployed while the economy is recovering, it can lead to too much rapid expansion in a short period of time. This lag Feldstein is talking about is called implementation lag. During the lectures, Professor Petry defined implementation lag as the time it takes to put the desired policy into effect once economists and policy makers recognize the economy is in a boom or a slump. Professor Petry also noted that the implementation lag for fiscal policy is always much greater than for monetary policy. Thus, the statement from Feldstein is consistent with what we have learned in Econ 103. Though the government did utilize fiscal policy in the great recession. This can be explained because the government realized the economy would not be coming out of the recession anytime soon, so they went ahead and implemented the policy. The risk for mistiming the policy was so small, they could take the chance on