Evaluation of monetary policy over the

He developed the idea of a liquidity trap. Property prices in much of the UK have remained fairly static until well into although London has seen very strong growth fuelled by population increases and demand from overseas investors. A loose or expansionary fiscal policy is just the opposite and is used to encourage economic growth.

Pro: Central Banks Are Independent and Politically Neutral Even if monetary policy action is unpopular, it can be undertaken before or during elections without the fear of political repercussions.

Strengths of monetary policy

Con: The Risk of Hyperinflation When interest rates are set too low, over-borrowing at artificially cheap rates can occur. But there is a level below which interest rates cannot go and at that point monetary policy may become powerless. Con: Monetary Tools Are General and Affect an Entire Country Monetary policy tools such as interest rate levels have an economy-wide impact and do not account for the fact some areas in the country might not need the stimulus , while states with high unemployment might need the stimulus more. Fiscal policy determines the way in which the central government earns money through taxation and how it spends money. This is sometimes referred to as the Fed's "dual mandate. This can then cause a speculative bubble , whereby prices increase too quickly and to absurdly high levels. Share on Facebook Share on Twitter Share on Linkedin Share on Google Share by email A number of reasons have been put forward to explain why cutting interest rates in the aftermath of a credit crisis and deep recession may have a limited effect on economic activity broadly defined as a recovery in real GDP and an expansion of employment, profits and investment. If spending is high and taxes are low for too long, such a deficit can continue to widen to dangerous levels. It is also general in the sense that monetary tools can't be directed to solve a specific problem or boost a specific industry or region. If these traditional measures fall short, central banks can undertake unconventional monetary policies such as quantitative easing QE.

This tends to make monetary policy tools more effective during economic expansions than recessions. Pro: Short Time Lag The effects of fiscal policy tools can be seen much quicker than the effects of monetary tools.

Keynesians believe that the size of the fiscal multiplier effect is higher for government spending than for tax cuts.

Disadvantages of monetary policy

Economists of the Monetarist school adhere to the virtues of monetary policy. To stimulate a faltering economy, the central bank will cut interest rates, making it less expensive to borrow while increasing the money supply. The effects on an economy may take months or even years to materialize. If these traditional measures fall short, central banks can undertake unconventional monetary policies such as quantitative easing QE. A loose or expansionary fiscal policy is just the opposite and is used to encourage economic growth. Fiscal policy determines the way in which the central government earns money through taxation and how it spends money. But there is a level below which interest rates cannot go and at that point monetary policy may become powerless. This is sometimes referred to as the Fed's "dual mandate. This can then cause a speculative bubble , whereby prices increase too quickly and to absurdly high levels. Adding more money to the economy can also run the risk of causing out-of-control inflation due to the premise of supply and demand : if more money is available in circulation, the value of each unit of money will decrease given an unchanged level of demand, making things priced in that money nominally more expensive. Subscribe to email updates from tutor2u Economics Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

Raising the prevailing risk-free interest rate will make money more expensive and increase borrowing costs, reducing the demand for cash and loans. This is sometimes referred to as the Fed's "dual mandate.

evaluation of monetary policy ib

Economists of the Monetarist school adhere to the virtues of monetary policy. Weak expectations lower the effect of rate changes on consumer demand — i. Adding more money to the economy can also run the risk of causing out-of-control inflation due to the premise of supply and demand : if more money is available in circulation, the value of each unit of money will decrease given an unchanged level of demand, making things priced in that money nominally more expensive.

The opposite effect would happen for companies that are mainly importers, hurting their bottom line. A tight, or restrictive fiscal policy includes raising taxes and cutting back on federal spending.

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Monetary Policy