Aggregate Supply and Demand, Essay Example

Analysis of U.S. Federal Monetary Policy

Responsive to the global financial crisis, the trend in New Keynesian models of monetary policy, and resurgence of interest in Neoclassical syntheses of macroeconomic DSGE (Dynamic Stochastic General Equilibrium) approaches to market decisions underscores the utilitarian focus of the U.S. Federal Reserve and major international policy institutions toward stabilization of aggregate demand (AD) and aggregate supply (AS). In consideration of the AS – AD the containment of inflation, and the state of structural employment set against monetary policy is of key importance.

Price insertion into the formula as understood by the Calvo Pricing model presents a baseline disequilibrium AS-AD model and Taylor interest rate rule, or IS curve dynamic. Sticky wages and prices set the pace for economist predictions of accurate inflation rates; and the adaption of economic policy accordingly. If monetary policy is posed to act sufficient redress will create equilibrium, yet does not have significant impact with variation in the inflationary climate or at times when there is a rapid adjustment to price inflation in the market.

Steady inflation is desirable as a normative indicator for monetary policy, and continuity of this can be achieved and sustained to an extent with active interest rate rules, and should especially be considered were wages are subject to an inflexible, downward spiral. The DSGE allow for substantial risk mitigation toward AS-AD, and aversion of any requirement for application of substandard economic models as it minimizes the ad hoc function in policy making.

Precision in timing of financial markets and goods markets does not really factor into fiscal and monetary policies, as asset pricing and macroeconomic allocation under a welfare-based monetary policy conduct might impact such transparent decision. Instead, monetary policy can avoid downward movements and control oscillation between a gap in AS-AD, and contractionary market stasis by way of adoption of a target rate of inflation that is appropriate to avoid stagnation, and gauge established and persistent fluctuations that might create equilibrium in a volatile cycle. Hence, the maturation of Keynesian thought emphasizes this dynamic – now a core macroeconomic building block to the ‘tradition’ of U.S. monetary policy.