The FED's Expansionary and Contractionary Monetary Policies During and After the Economic Recession

In these difficult times, people are faced with one of the toughest jobs in our country's history. The media said economic recovery is imminent, but many people still want to know when they can see the light at the end of the tunnel. The Federal Reserve Bank or the Federal Reserve Board has been called upon to formulate an "exit strategy" in the fear that the expanding monetary policy they use rapidly turns the depression into high inflation. This "exit strategy" can be said to be a tight monetary policy, it will be used to offset inflation and will surely follow the economic recovery.

Monetary policy is called expansion or contraction. Expansion policies aim to accelerate economic growth, while austerity policies are trying to limit economic growth. Expansion policies have traditionally been used to try to cope with unemployment in recession by lowering interest rates in the hope that loose credit will attract business expansion. This is accomplished by increasing the available money supply in the economy. The expansion policy is trying to promote the growth of total demand. As you can imagine, total demand is the sum of personal consumption, investment, government expenditure, imports. Monetary policy focuses on the first two elements. The central bank encourages personal consumption by increasing the amount in the economy. Increasing the money supply will lower the interest rate, thereby promoting loans and investment. Increased consumption and investment will lead to an increase in aggregate demand

Figure 2. Expansion or contraction of monetary policy (a) The economy initially faced a depression, equilibrium output and price levels are indicated by E0. The enlarged monetary policy lowers the interest rate and shifts the aggregate demand from AD 0 to AD 1, resulting in a new equilibrium (E 1) at the potential GDP level while the price level is relatively small. (B) The initial output of the economy is higher than the potential GDP output of E 0, and it receives pressure from inflation price rise. The shrinking monetary policy will shift the aggregate demand from AD 0 to AD 1 and will create a new equilibrium at the potential GDP production level (E 1)