Aggregate Demand & Aggregate Supply

Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policy, such as the recent lowering of the federal funds rate in a target range of 0 to 1/4 percent by the Federal Reserve’s Open Market Committee to try to achieve lower unemployment rates in light of the Covid-19 pandemic’s impact on the U.S. economy. Theoretically, “…an increase in the money supply lowers the interest rate, thereby increasing investment and aggregate demand” (McConnell, Brue, & Flynn, 2018, p. 246).

Use the Aggregate Demand and Aggregate Supply Model and the Federal Reserve News Release (2020) to explain why these policies might at first succeed in the short-run; but have negligible or negative impact on the U.S. economy over the long-run, which some economists project will result in 9-million people being unemployed when projections at the start of the COVID-19 pandemic estimated only 1-million workers would be affected.

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