Essays on Liquidity Trap

Response

Response 5. Explain the effectiveness of monetary policy. Monetary policy is an item that is used by the state or author in an attempt to control instances of inflation and ensure that there is price stability. The central bank has the mandate to monitor the growth and the size of the money supplied. Various strategies are used to control and maintain the monetary policy. For example, selling or buying the government bonds, adjusting interest rates and managing the bank reserves (Galí & Gertler, 2009). Monetary policy is effective. This is based on the expansionary policy. If an increase in the ...

1. The Financial Crisis: Avoidable but Inevitable Theoretically, the financial crisis could have been avoided as investigation findings revealed . Under the circumstances however, the crisis was an inevitable consequence of everything that was going. The Federal inquiry concluded that the 2008 financial crisis could have been avoided. The crisis was the result of “widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street”. It was the result of “greed, ineptitude or both” on the part of government and the private sector. Among the persons found responsible for the crisis included Federal Reserve Chairman Alan Greenspan and, ...

Introduction

A discussion among the classical economists and the Keynesian economists continues on the government intervention in the free markets. According to the classical economists, the free market mechanism can develop solutions for the crisis in the market if there is no external influence on the markets. The Keynesian economy merely expresses that the free market economy carries the risk of generating crises and undesired deficit or surplus in the economy when the demand cannot clear the supply (Posner 234-252). The discussion on the government intervention is changing direction each time the world economy suffers from a global crisis becomes ...

The dynamics of the economy when the interest rates are at almost zero are a bit complicated, especially because the monetary policies have very little effect on the economy. However, the interplay between the fiscal and monetary policies will bring the economy to stabilization even though with great difficulty. Some of the factors at play bring a tradeoff between the success and failure of the possible policies. For example, the policies that will bring down the level of unemployment will tend to push up inflation. However, factors that will push the GDP upwards will also lower the rate of ...

The IS LM model or the Hicks –Hansen model is the macroeconomic tool that shows the relationship between the interest rates and the real output of goods and services and the money market. The intersection of the investment - saving curve or the IS curve and liquidity preference curve or the money supply curve is the general equilibrium in both the markets .This model explains the changes in the national income when the price level is fixed in the short run and also shows the reason for the shift in the aggregate demand curve. It was first developed by ...

Q1. Identify two strategies based on the fiscal and monetary policy that would encourage people to spend money in order to create economic growth. Fiscal and monetary policies are demand side policies that can be strategically employed for realizing economic growth by motivating consumers to spend money. It can be made possible by brining an increase in aggregate demand (AD) if the economy is passing through recession or growth is below the expected level (Pettinger, 2012). Monetary policy can be the most randomly used tool for impacting economic activity. To encourage AD, the Central Bank of a country can ...