Question

How domestic economic policy & decisions are made in the short run and in the long run.

Answer 1

There are different goals in short run and long run set by the government and the central bank of a nation with regards to the economy. While the long run goals are stable prices and full employment, short run goals are basically relying on corrective mechnanism that bring the economy close to the full employment and negating any deviation from this level.

Federal government uses fiscal policy of taxes, spending, transfer income and mandatory entitilements to keep the economy near its full employment level. Besides there are additional goals of social welfare, redistribution of income to reduce poverty and income inequality. Federal Reserve takes care of the financial market, commericial banks via its monetary policy tools of discount rate, reserve requirements and open market sales. These are the tools of monetary policy used to increase or decrease the money supply that infleunce aggregate spending. In terms of AD-AS analysis, the whole concern is to influence AD so as to initiate the necessary shifts that closes the recessionary or inflationary gaps.