ECO372 Aggregate Demand And Supply Mode
Aggregate Supply and Demand Models
ECO/372
November 24, 2014
Aggregate Supply and Demand Models
Current state of Interest Rates and their effect on the U.S. economy
Since the financial collapse of 2007 the United States Federal Reserve has maintained a system of policy accommodation consisting of lowering short-term interest rates to near zero levels, and buying large quantities of longer-term Treasury securities in order to encourage new spending and maintain the current prices of assets. Because of this policy, aggregate supply and demand remain relatively unchanged in order to maintain stable prices, moderate long-term interest rates as well as maximum employment. According to "Board of Governors of the Federal Reserve System" (n.d.), in order to support continued progress toward the above mentioned goals, the Federal Open Market Committee “reaffirmed in its October 2014 statement its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation.” The committee also anticipated, “based on its current assessment, that it will be appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a considerable time following the end of its asset purchase program (October 2014).” (Why are interest rates being kept at a low level?).
When viewed through the perspective of the Keynesian model (which focuses entirely on the short-run) these policies currently in use are having the desired effect on the economy. Lower interest rates and creating more money are encouraging spending which, in turn, are holding prices and employment within manageable levels. On the other hand, when viewed through the perspective of the Classical model there is a problem with this policy, interest rates cannot be lowered
ECO/372
November 24, 2014
Aggregate Supply and Demand Models
Current state of Interest Rates and their effect on the U.S. economy
Since the financial collapse of 2007 the United States Federal Reserve has maintained a system of policy accommodation consisting of lowering short-term interest rates to near zero levels, and buying large quantities of longer-term Treasury securities in order to encourage new spending and maintain the current prices of assets. Because of this policy, aggregate supply and demand remain relatively unchanged in order to maintain stable prices, moderate long-term interest rates as well as maximum employment. According to "Board of Governors of the Federal Reserve System" (n.d.), in order to support continued progress toward the above mentioned goals, the Federal Open Market Committee “reaffirmed in its October 2014 statement its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation.” The committee also anticipated, “based on its current assessment, that it will be appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a considerable time following the end of its asset purchase program (October 2014).” (Why are interest rates being kept at a low level?).
When viewed through the perspective of the Keynesian model (which focuses entirely on the short-run) these policies currently in use are having the desired effect on the economy. Lower interest rates and creating more money are encouraging spending which, in turn, are holding prices and employment within manageable levels. On the other hand, when viewed through the perspective of the Classical model there is a problem with this policy, interest rates cannot be lowered
References: Board of Governors of the Federal Reserve System. (n.d.). Retrieved from http://www.federalreserve.gov/faqs/money_12849.htm Macroeconomics policy and U.S competitiveness. (2014). Retrieved from https://hbr.org/2012/03/macroeconomic-policy-and-us-competitiveness/ar/1 Global policy forum. (2014). Retrieved from https://www.globalpolicy.org/component/content/article/252-the-millenium-development-goals/52614-new-briefing-demands-fiscal-revolution-to-finance-sustainable-development.html Bureau of Labor Statistics. Retrieved from http://www.bls.gov/cps/cpsaat25.pdf Bureau of Labor Statistics. Retrieved from http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.t12.htm