Question

As an economic analyst, you were asked to provide your opinion about the impact of the financial crisis on the economy by using the new classical model. If the Malaysian government implemented monetary expansion policy that is less than expected, what would your expectations be when it comes to the effects on real output in the short-run and the long-run?  

Answer 1

New classical model will be trying to exploit the imperfect competition through building with the policies related to capital wedge, labour wedge, and productivity wedge.

In current scenario to analyse the effect of financial crisis on the economy, one should be trying to to adopt quantitative easing method in its overall monetary policy in order to stabilize the economy because the central bank will be needing to stabilize the economy through stimulation of demand which is the need of the hour because the demand has completely slowed down in the economy due to fear arising out of expectation of an impending recession.

The Malaysian government should be implementing monetary expansion policies which will be focused towards highly public expenditure, that would be cutting of the interest rates and providing up with various bailout packages and support services and rolling out low interest loans in order to provide support to various individuals and help the economy stabilize through generation of demand

I think the implication of monetary expansion policy on the real output in the short run would be positive because it would be helpful in stabilizing the demand of the economy and it will also help in generation of the employment in the economy

implication of monetary expansion in the long run can be negative because it will be shrinking the books of accounts of the Government and it will also lead to a lot of creation of sovereign debt which will have to be redeemed at a Future point of time.