Evaluations of Monetary Policy

Recall:
Expansionary Policy

1. increase money supply
2. reduce interest rates
3. increase investment spending
4. boost GDP

Restrictive Policy

1. reduces money supply
2. increase interest rates
3. decrease investment spending
4. decreases inflation

Strengths / Weaknesses of Fed Policy

Strengths 

• speed and flexibility
• low lag
• political acceptability

•  board members serve 14 year terms (less lobbying)
• can make politically hard choices
• (avoids political problems with Fiscal policy) 

weaknesses

• time lags
• recognition, operational
• ineffectiveness in severe recession
• firms are reluctant to borrow and invest, even if interest rates are low

"Pushing vs. Pulling on thread"

Restrictive 

• MP can "pull" AD to the left
• have very high interest rates  
• no limit on restricting money supply
• "pulling on thread"

Expansive

• MP may not push AD to the right
• pessimistic firms may sit and wait
• expand excess reserves, but nobody wants to acquire debt
• "pushing on thread"