Montery Policy Essay Example | Topics and Well Written Essays - 500 words

Montery Policy - Essay Example Monetary expansionary policy is traditionally used to combat unemployment during recession, by lowering interest rates and increase in the total money supply. This is done with a view to increase consumer spending, creating demand for goods and services. However, if checks and balances are not kept in place, increased money supply with inadequate increase in supply of goods and services may lead to inflation, which in turn may accentuate demand contraction and therefore, recession! Mackay and Evans article, ‘Recession fears weigh heavily on the markets’ (WSJ, Nov 26, 2007) deals with the situation of the US economy in the background of mounting worries of market players about the sluggish economic growth and sub-prime crisis in the housing and mortgage markets. The 8.4% drop in the Dow Jones Industrial Average index, during the third week of November 2007 from its all time high and increased interest in the bond market are pointers to the market worries. The Federal officials do not share this gloomy prediction and expect the economy to clock 1.8 to 2.5% growth in the next year and that the sub-prime crisis should bottom out soon. This view is also supported by the Commerce Department, which is revising the Jul. – Sept. 07 GDP growth to 4% and confirming positive income and job growths. J.P.Morgan on the other hand, predicts a much lower growth rate of 1.5% in the first three quarters of 2008. Both The article points out to the delicate balance in the various sectors of the economy which could be upset, if institutions reduce lending to the housing sector and if this is coupled with reduction in spending by consumers on gasoline due to rising fuel prices. A slump in consumer spending is bad for the US economy as well as for the economies around the world, which export their products to the large US market. The contagious effect of the US housing crisis to the European