Macro & Micro Economics - Essay Example

Conditioning, if credible can be used for reducing the inflationary consequences of a resulting increase in aggregate demand from the post crisis deleveraging. Even after reducing the benchmark rate at zero, the Federal Open market Committee which sets policies tried to continue to add stimulus by pledging to keep the interest rates low through 2014. Evan continues to make explicit promises by putting forth that the Federal Reserve would continue to tighten the policy until and unless the rate of unemployment came down below 7% and inflation breached at 3% (Aki, “Bloomberg”).

Evans and the economists Jonas Fisher, Jeffrey Campbell and Alejandro Justiniano mentioned in an article presented by the Brookings Institution in Washington that forward guidance in the statements of monetary policies have been effective in increasing yields through Corporate Bonds and Treasury Notes since the beginning of the global financial crisis (Aki, “Not Voting Member”). Reference of article to theory- Monetary Growth and Inflation The article above is linked to the theories in macroeconomic.

There is strong empirical evidence which shows a direct relationship between money supply in the economy and long term price inflation for the rapid increases in the supply of money within the economy. This is the reason why governments rely strongly on monetary policies for controlling inflation. Economists have identified two links between the supply of money in the economy and the rates of inflation (Hetzel, p.205-206). Firstly an increase in the supply of money, if not trapped within the financial system as being excess reserves can lead to the sustained increase in the level of real production rather than inflation after a recession when many of the nation’s resources remain underutilized.

Moreover, they have emphasized on the changes in the velocity of money, which is the ration between the nominal gross domestic product and the supply of money which leads to an increase in the money supply can bring about an exaggerated effect on the growth of nominal gross domestic product (Hetzel, p.205-206). Researchers have suggested the use of conventional monetary policies which influences the macroeconomic factors by bringing about changes in the credit availability in the economy and also the rate of interest or the price of the credits.

The monetary policies act upon the rates of interest and consequently the money supply too. The control in money supply through adjustment of interest rates control inflation rates in the economy. However, it is important that in such cases the real interest rates are considered and not the nominal interest rates. This is because the real value of a loan diminishes with inflation and simultaneously revenues in businesses and household incomes also rise with inflation. Thus the ability of payment of a loan increases with rise in inflation rates.

However, researchers have also identified certain imitations with the use of monetary policies controlling inflation rates (Baumeister & Benati, p.5-7). In the 1990s inflation rates were extremely low, but this was not because of tight monetary policies. During the same