Monetary Policy in the Attached Resource Files,

Monetary Policy

In the attached resource files, there is a chart that outlines three perspectives on how the economy should be run: the mainstream macroeconomics perspective, the monetarism perspective and the rational expectation perspective. Which one of these approaches do you most agree with? What in Macroeconomics supports your point-of-view?

The view that makes the most sense is the rational expectation perspective. The reason why, is because this will take into account a number of real world factors that will have an impact upon economic growth. The most notable include: the private economy is stable when you are at the natural unemployment rate, there can be unexpected shocks to aggregate demand / aggregate supply over the short-term, cost push inflation is fueled by the lack of growth in the money supply and changes in monetary policy will have little impact upon inflation over the short-term. (Summary of Macroeconomic Views)

What is supporting these views, are the events that have been occurring since the implosion in real estate values in 2007. Where, the various central banks around the world have been engaging in activities that will prevent the economy from going into a free fall. This is designed to help support the natural unemployment rate by: reducing the total impact that sudden shocks will have on the financial system (as this will have ripple effects in the economy). A good example of this can be seen with the Federal Reserve's decision to purchase $600 billion in Treasuries. This was part of an effort to ensure that there were no secondary lingering effects of the recession. At the same time, these actions were designed to address the natural rate of unemployment by: supporting continued economic growth. This would cause the unemployment rate to decline, helping the Fed to move one step closer towards achieving its goals. As a result, this is illustrating how this approach has often been used to deal with various challenges that modern central banks are facing. (Lanman)

What is our most important current economic problem?

The biggest economic problem that the country is dealing with is the rising levels of the national debt. This has become a major issue over the last several years, as these increasing amounts have meant that the U.S. could be dealing with a major economic crisis down the road. What would more than likely occur is that a number of calamities would have an adverse impact on economic growth. This is because the rising levels of debt, will force the government to divert more of their funds away from providing various services to the general public. At the same time, this would have an impact upon economic growth by: forcing the public to pay higher taxes and interest rates. This will make it difficult for consumers to spend money or businesses to hire someone. (Amadeo)