Extended Essays 2021

With the implementation of several monetary policies by the United States federal

government, as shown in Diagram 2. The impetus for AD2 to move upward during the

epidemic period. At this point, two situations may arise. The first is that during the epidemic

period, AD was affected by monetary policy and moved right to the position of AD3 but did

not return to the position of AD1 before the epidemic. This means that the monetary policy

may not be sufficient enough, and there is no overused.

The other situation could be that after AD is restored to the position of AD1, the monetary

policy implemented by the government still plays a role in the U.S. economic market,

resulting in AD continuing to move to the right to AD4. Therefore, as shown in the figure, it

will cause the price level to rise to PL4, which will lead to inflation, but at the same time will

not lead to the growth of real GDP. Therefore, the monetary policy is overused.

Therefore, based on these two diagrams of the possible impact of monetary policy, the

method to determine whether the current monetary policy is overused can be divided into

three theories to determine: whether the inflation rate is too high, from the perspective of

GDP recovery, and whether the unemployment rate has returned to the previous level.

3.2 Inflation rate

According to the theoretical of the monetary policy impact, an increase in inflation will

eventually trigger the Fed’s tightening response, which will inevitably lead to a slowdown or

recession in the economy and contraction of national income (DeLucia, 2021). Therefore,

monetary policy that leads to inflation above the previous normal level could be considered

an ‘overused’ monetary policy.

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