In conclusion, the basic economic principles from the Keynesian era dictate that changes in the monetary and the fiscal policy directly impact inflation and unemployment. The reason for this is that an increase in money supply means that there is more currency in the market. This in turn leads to more spending which drives up the prices of goods. This can be understood in the context of basic supply and demand. As such, the government’s failure to address these basic problems shows that the government can indeed be held accountable for such crisis.
This relation to unemployment, however, is quite different and may depend on many factors. Simplistically speaking, however, unemployment can be reduced by a change in either monetary or fiscal policy that encourages the growth of small to medium scale businesses. By decreasing interest rates, the money supply increase thus allowing individuals and firms more access to capital that is need to run their own businesses. One way to look at this problem in the real world setting is to discuss the impact of such in relation to the current economic stimulus that the United States government has planned.
As shown by certain researchers, the projected loss of jobs and increase in unemployment rate is not necessarily affected by any economic stimulus package. This is the reason why the question on whether or not the package should be higher is not really relevant. Loss of jobs can be attributed to the economic fundamentals of the United States economy such as the shift in production facilities to other countries. This would mean that changes in monetary and fiscal policy would not necessarily have a direct effect on the unemployment rate.
So while current theories show that monetary and fiscal policies may indeed impact inflation and unemployment, such is not always the case in certain situations as shown in the example provided. The basics such as solid economic fundamentals must always be considered when looking at the impact of such changes to see if they can really attain the desired effect.
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