Policy Summary and Countercyclical Options

Recession :

An efficient "full employment" economy will probably have

• an annual unemployment rate of 4 - 5 %
• an annual inflation rate of 2 - 3 %

If the economy goes into a recession

• the real GDP will decrease for at least 6 months
• the unemployment rate will go up to 6 % or more
• the inflation rate will go to 2 % or less

If Congress enacts Keynesian Fiscal Policy to attempt to slow or stop the recession, then

• the policy will try to improve C or G ( parts of AD )
• Congress will cut federal taxes
• Congress will increase jobs and spending programs
• the federal budget will create a deficit
• due to changes in Money Demand, interest rates will increase
• ( crowding out might occur, but Keynesians don't care )

If the Federal Reserve employs Monetary Policy options to slow or stop the recession, then

• the policy will target improvement in Ig ( part of AD )
• the FED will target a lower federal fund rate
• the FED can lower the discount rate
• the FED can buy bonds ( Open Market Operations )
• the FED can ( theoretically ) lower the reserve requirement, but probably won't because it is too complex for the banks
• the FED policies will lower the interest rates through changes in the Money Supply
• these options should increase Ig

Inflation :

If the economy suffers from too much demand-pull inflation then

• the unemployment rate will go to 4 % or less
• the inflation rate will go to 4 % or more

If Congress enacts Keynesian Fiscal Policies to attempt to slow or stop the inflation problems,

• the policy will try to decrease  C or G ( parts of AD )
• Congress will increase federal taxes
• Congress will decrease jobs and spending programs
• the federal budget will create a surplus
• due to changes in Money Demand, interest rate will decrease

If the Federal Reserve employs Monetary Policy options to slow or stop the inflation problems, then

• the policy will target decreases in Ig ( part of AD )
• the FED will target a higher federal fund rate
• the FED can increase the discount rate
• the FED can sell bonds ( Open Market Operations )
• the FED can ( theoretically ) raise the reserve requirement, but probably won't because it is too complex for the banks
• These FED policies will increase the interest rates through changes in the Money Supply
• These options should decrease Ig