ECON 201 Lecture Notes - Lecture 21: Fiscal Policy, Monetary Policy, Output Gap

• School: University of Maryland
• Department: Economics
• Course: ECON 201
• Professor: John Neri

Document Summary

Fed was choosing which companies would fall or not: assuming authority that belongs to the congress, putting tax payer money at risk, huge injection of reserves opening the door to future inflation. Defined asset prices rise above fundamental value: fed"s traditional answer is no. 2 main reasons: difficult to identifying bubbles before they burst. How do we separate fundamentals from the bubbly : fed may not have any policy instruments that it can use to target just the bubble, i. e, run away stock prices. Increasing interest rates might deflate bubble but also slow economy. The dodd-frank act of 2010: bubbles are inherent part of cycle of financial capitalism, sturdier financial system can limit size and effects of bubbles. The great recession rekindled this old debate. Questioning conventional wisdom: congress can act quickly when it must, massive recessionary gap suggested both necessary, once the federal funds rate reaches zero conventional monetary policy could use help from fiscal policy.