Monetary Policy: The Best Case Scenario

Imagine that you’re the Fed and monetary policy is your domain. The economy has been doing fine: inflation isn’t too high, GDP is growing at a reasonable rate. But then something happens. Consumer confidence drops. The economy shrinks.

What do you do? This is a simple scenario, but choosing when and how to respond is still a complicated dance. Data quality, timing, and limited control all present big challenges when implementing monetary policy changes.

Let’s say you make a decision to act and grow the money supply. What if you made the wrong choice? Depending on whether you under- or overshoot, the consequences could be fairly minor; or they could be huge. They could even lead to a severe recession.

In the video, we’ll discuss the details of this scenario and how the Fed might respond. We’ll take a look at how the responses affect the long- and short-run aggregate supply curves. You’ll walk away with a better understanding of when and how the Fed intervenes on a broad level when the economy is in trouble.