Economics Case

In my opinion, there are many pros and cons to the Federal Reserve Bank continuing to increase the monetary supply. In the monetary policy video, the Federal Reserve Board led by Chairman Burns did not increase the monetary supply because he did not believe that it would relieve the economy. The restraint to increase the monetary supply at first seemed cruel to the economy. Small businesses were suffering and the interest rates were high. By late 1982, though, the inflation rates dropped and the money supply was eased. The strict monetary approach caused V (velocity) and Q (gross domestic product) to jump all over the place, but in the long run P (price level) could be controlled by keeping a firm hand on M (money supply). Compared to the strict monetary approach, is increasing the money supply a better option? Through quantitative easing, the Federal Reserve Bank hopes to decrease inflation and stimulate new jobs. As the money supply rises, though, the value of the dollar declines. This causes the cost of imports to escalate and traveling abroad to become more expensive. The cheaper dollar will, however, lead to an increase in exports and therefore more jobs. Quantitative easing depends a lot on the commercial banks and their willingness to lend the additional money. One of the problems in the United States is that the banks are holding onto the money, which only boosts reserves. In my opinion, it is hard to say whether the Federal Reserves decision to continue to increase money supply is beneficial to the economy. I believe that monetarism is necessary, though, for the US economy to function and bring the equation of exchange to equilibrium.