those polices were predicated on 1930s Keynesian assumptions that economic recov

Question

those polices were predicated on 1930s Keynesian assumptions that economic recoveries always run out of steam and at certain points need artificial stimulation of demand and fine-tuning to keep them running at acceptable levels .The evidince of the 1970s and beyond is that whenever governments stepped in to admisiter stimulate medicine , they triggered runaway inflation which finally had to be stopped with strong ,painful doses of recession..

a-whaty do Keynesian recommend for artificial stimulation of demand ?

b- Describe how such stimulation could trigger runaway inflation ?

c-Explain why stopping this inflation requiers a recession ?

d-What alternative policy might possible?

Explanation / Answer

a)

According to Keynesians suggestion the government action is necessary in order to increase consumption in order to stimulate demand. Keynesians advocate for government intervention when necessary, and an artificial stimulation of demand is one of those times when it is necessary. Basically, he suggests stimulus by the government in order to artificially increase demand. When business cycles throw the economy into a recession, it is the governments job to stimulate demand to bring the economy back up.

b)

Keynesians believes that government policies should pursue active policies to stabilize economic fluctuations. Mostly, the policy will stimulate the economic growth and the inflation rate will increase.In order to stop the inflation, limit the economic growth is needed.

c)

The annual inflation rate in the United States could hit 15% by late 2013 or early 2014, and the Federal Reserve may be powerless to stop it.

While much can change the risk of inflation, the single most important driver of a rise in the general price level is the relationship of the money supply to economic activity.

Since the economic meltdown began in 2008, the Fed has pumped an unprecedented amount of money into bank reserves. In 2011 alone, adjusted bank reserves increased at a compounded annual rate of 47.1%. As these bank reserves filter into the business and consumer economy, the risk of inflation rises.

Until recently, the reserves weren't going anywhere. The banking industry was taken to task for making risky loans before the economic meltdown. So they were happy to sit pat.

What's more, in October 2008 the Fed started paying interest on reserves held at the Federal Reserve Banks. Apparently designed to help buoy bank balance sheets, this made it profitable for banks to forgo lending in favor of the low-risk profit provided by the Fed's interest payments.

Banks are currently holding about 15 times more than the roughly $100 billion in reserves required by the Fed, or $1.5 trillion. Historically, banks

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