Fed Expansionary Monetary Policy

764 WordsJul 10, 20184 Pages
Fed Policy Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed…show more content…
With higher reserves (money that the Fed gives banks to lend and accumulate profit in exchange for assets), inflation will increase because there is more money going around in the economy where the unemployment rate is low. In the current economy, the problem of unemployment has been mitigated through the expansionary monetary policy, but not to the greatest possible extent. A problem at hand is wage rates do not accommodate inflation. If the Fed abandons expansionary monetary policy, inflation rates would rise but not in accordance with wage rates. “Wage growth — by any measure — is far below its pre-crisis level… makes no sense at all to tighten until we see wage inflation rise, not just from its current level, but several points higher” (Krugman, Nowhere near the exit). The existing minimum wage working labor force ultimately hinders the economy through their inability to contribute to consumption because their income is spent on the bare minimums required to survive. By increasing the minimum wage, transfer payments (money government pays out through programs such as social security) would decrease and tax revenues would increase, which would lead to an increase in revenue, thus adding to the GDP. While it may be true that increasing the minimum wage In fact, “raising the minimum wage actually helps businesses by increasing productivity, boosting demand for new workers, and
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