Question

Monetary policy's from 2000 - 2010 in the US

•In late 2000 the Federal Open Market Committee began to lower the target for the monetary policy rate

•The historically low fed fund rate resulted in a negative rate from 2002 to 2005

•Two-Thirds of all mortgage originations were from home refinance during the time of the fed funds rate at 1%

•Money was spent through home equity extraction and amounted to more than 4% GDP in 2005

•Th U.S. economy had much government spending on the Wars in Iraq and Afghanistan

•Bush Tax Cuts

Question:

Did the policy's lead to high inflation, lower unemployment?

Answer 1

The policy measure of lowering monetary policy rates is expansionary monetary policy in action. Expansionary monetary policy causes interest rates to decline and increase in the level of income. Increased level of income raises the demand for goods and services which results in higher prices. Increased demand also reduces the level of unemployment.

Similarly, increased government expenditure and tax cuts is expansionary fiscal policy in action. Such measures directly raises the level of income in the economy. This raises the demand for goods and services. As a result, while prices increase, unemployment declines.

So, the policy measures lead to high inflation and lower unemployment.