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Monetary Policy, Screen Shot 2022-04-18 at 4.15.05 PM, Screen Shot 2022-04…

- - - - Causes of high inflation:
        
        Excess AD
        
        Fixes:
        
        Implementing a contractionary monetary policy
        
        Benefits:
        
        Slows and reduces inflation
        
        Drawbacks:
        
        Increased unemployment
        
        Slowing down the economy because there is a decreased money supply
        
        Slowing down of production due to reduced money supply
        
        RWE: https://www.thenationalnews.com/business/economy/2022/04/15/fed-set-for-a-half-point-interest-rate-increase-to-curb-inflation/
        
        In this example, the FED increased the interest rates by 0.5% in order to decrease inflation, which rose by 8.5% because of the Ukrainian war.
    - - Causes of high unemployment rate:
        
        High inflation
        
        Decreased AD
        
        Fixes:
        
        Implementing an expansionary monetary policy
        
        Benefits:
        
        Decreases unemployment
        
        Increases production because there's more supply of money
        
        Economic growth
        
        No political intervention
        
        Drawbacks:
        
        Increase in interest rates
        
        Ineffectiveness when interest rates are low
        
        Low consumer and business confidence
        
        RWE: https://www.reuters.com/world/africa/south-africas-unemployment-rate-hits-new-record-high-q4-2021-2022-03-29/
        
        This example talks about how South Africa's unemployment rate rose to a new record high of 35.3% in the fourth quarter of 2021 from 34.9% in the third quarter. The government could impose an expansionary monetary policy to increase AD and create more jobs.
    - - Causes of low economic growth:
        
        Rise in unemployment
        
        High inflation
        
        Low AD
        
        Fixes:
        
        Implementing expansionary or contractionary monetary policies
        
        Benefits:
        
        Absence of "crowding out"
        
        Reduces unemployment
        
        Reduces inflation
        
        Improves public services and infrastructure
        
        Higher incomes
        
        No political intervention
        
        Drawbacks:
        
        Ineffectiveness when interest rates are low
        
        Low consumer and business confidence
        
        Recession after inflation
        
        Negative externalities
        
        RWE:
        https://www.bangkokpost.com/business/2296690/bot-maintains-its-monetary-policy
        
        This example explains how the bank of Thailand implemented a monetary policy to support economic recovery because they view that supply-side inflationary pressure will be a temporary factor.
    - - Causes of business cycle fluctuations:
        
        Changes in interest rates
        
        Levels of employment
        
        Consumer expectations
        
        Changes in AD and AS
        
        Fixes:
        
        Implementing expansionary or contractionary monetary policies
        
        Benefits:
        
        Absence of "crowding out"
        
        No political intervention
        
        Can pull an economy out of a deep recession
        
        Stable levels of employment
        
        Drawbacks:
        
        Ineffectiveness when interest rates are low
        
        Low consumer and business confidence
        
        Can lead to a fall in net exports and investment due to an increase in government expenditure
        
        Opportunity cost
        
        RWE: https://timesofindia.indiatimes.com/business/international-business/germany-in-2023-recession-if-russian-gas-stopped-economic-institutes/articleshow/90817891.cms
        
        This example talks about how an end to Russian energy imports would send Germany into a "sharp recession" because they are highly dependent on Russian gas. The Russian government could implement monetary policies to pull the country out a recession.
    - - Causes:
        
        Exchange rates
        
        High inflation
        
        Low AD
        
        Fixes:
        
        Implementing expansionary or contractionary monetary policies
        
        Benefits:
        
        Absence of "crowding out"
        
        No political intervention
        
        Expansion
        
        Economic growth
        
        Reduced unemployment
        
        Drawbacks:
        
        Ineffectiveness when interest rates are low
        
        Low consumer and business confidence
        
        If spending increases without an increase in revenues, the government has to borrow; this is called deficit spending. This causes a fall in investment.
        
        Opportunity cost
        
        RWE:
        https://www.investmentmonitor.ai/special-focus/ukraine-crisis/ukraine-russia-conflict-impact-trade
        
        This example explains the impact that the Russian invasion in Ukraine will have on trade. This could be fixed using either monetary policies.