Demand And Supply Of Money Income

PART 1 Maintaining a low level of unemployment as well as a low inflation rate are part of the dual mandate of the FED. The possibility of having low inflation and low unemployment is given by the Philips curve it provides policy makers with a tradeoff between inflation and unemployment in the short run. A government can keep unemployment under check and allow inflation OR it can keep prices under check without being able to control unemployment. This tradeoff is shown as a negative relation between inflation and unemployment. In the long run the curve is vertical at natural rate of unemployment, so that there government has no control over unemployment, it can only manipulate the inflation rate. As given, unemployment rate is very high while inflation rate is at acceptable level of 2. This requires expansionary fiscal policies that include an increase in government expenditure on goods and services or a substantial reduction in tax rates. The primary impact of this policy is the rise in budget deficit ( G-T). monetary policy can also be used to raise money supply so that consumption and investment spending is not constrained by lack of money. The use of lowering FED rate,