Question

1. What is (Keynesian) Monetary Policy? (Explain/Discuss with emphasis on ONE of the bullets)
   • Discuss the last two recessions (2007-8 and 2020) in terms of monetary policy.
   • Discuss bank regulation following the Great Depression and bank deregulation starting in the 1980’s.  How was this a factor in the financial crisis?

Answer 1

Keynesian Monetary Policy

The Keynes Theory of Monetary Policy is based on three concepts

1. Investment Multiplier
2. Marginal efficiency of capital
3. Interest rate.

The sole objective of the monetary authority is to use influence over the interest and the rate the economy from its long period equilibrium position that is characterized by un employment and it propel towards the long period equilibrium position which has full employment.

The policy states that there is a indirect link between the money supply and the real GDP. The expansionary monetary policy increases the loanable funds available through the banking system and leads to the fall of interest rate. The lower interest rate, aggregate expenditure on investment and interest sensitive consumption of goods usually increase and leads to rise in real GDP of the country.

Recessions and monetary policies

The recessions in 2007-2008 and 2020 mainly faced two problems that is

Unemployment

Deflation.

Keynes monetary policy put forward some answers to combat with these two dilemmas at the same time by boosting the global demand.The main steps undertaken by the state government is reduced tax rates, lower interest rate, increased public spending and reduced exchange rate in order to bring competency.

The recession in 2008 also bring liquid assets crisis. In keyenes monetary policy emphasised more on agent's expectation. Keynes believes that when the uncertainty is become higher, the economic agents will prefer over spending and due to overspending the consumption, investment and demand will be reduced.Keynes does not rise in tax rates it collapse in the efficiency of the capital. The pessimism and the instability with the breakdown in the capital efficiency whre people prefers liquidity and it will lead to decrase in investment.

In recession period the inflationary and recessionary gaps will be last for longer periods abd there must be use the fiscal and monetary policies in order to shift the aggregate demand curve to close the gaps between recession and inflation.

During the time of first four years of the Great depression the aggregate demand is too low. When the recessionary gap is wide the nominal wages will be fall and the short run aggregate supply will be shift to the right. But it is not sufficient to close the gaps.

Bank Regulation and Bank deregulation in early 1980's

Before 1930 the occurence of Great Depression , the rules governed over the commercial bank influenced the decision makera (the shareholders and the managers) who is always liable for the losses incurred to the banks. This liability may in the form of a double liability and it is applicable to all the stock holders of national and the state chartered banks. The executives and managing Directors oth these bqnks must be liable because the law itself requires them to hols the adequate number of shares in the organisation that they supervised, if they are failed to hold that they will be face the civil liability and criminal investigations.

Interstate branching which exist among the U S the national banks restricted from opening branches but some of the state chartered bank they were allowed to open branches in their countries. This may lead to fewer bank suspensions.

The DEREGULATION in early 1980's benefited the depository institutions mainly rhe thrift industrial sector, also altered the composition of the matket.The DIDMCA removed the ceilings of interest rate on deposits and removed the advantage of interest rate held by banks. It is the process of removing or litigatung the regulations of state. It repeals the governmental regulation on the economy.

The main reason for the financial crisis is the deregulation of the financial industry. The deregulation permitted the baking institutions to engage the activities other taan banking nature ie, they engaged in hedge fubd trading with derivatives. Banks demanded more mortgages to support the profitable sale of those derivatives.when values of derivatives crumbles the bank stopped the lending to each other and it leads to financial crisis.