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Greenspan

            This article is from the Thursday, April 18, 2002 edition of the New York Times.
             It discusses the implications of Federal Reserve Chairman Alan Greenspan testimony in front of Congress. He said that the Federal Reserve Board would not increase interest rates when the meet again on May 7 because of they are unsure of the economy's strength due to the recession earlier this year. So far they have lowered rates to 40 year lows 11 times last year to help ameliorate the recessionary gap in the economy. So far it seems like the fed's actions have been successful in recovering from the crises but it is still uncertain whether our economy has reached natural equilibrium in unemployment and Real GDP. So as not to upset and swing the economy back into recession the Fed will avoid raising rates.
             The economy first went into the recessionary gap as the Real GDP fell from point 1 to point 2 on graph A but the Keynesian transmission mechanism was implemented skillfully by the Federal Reserve board to have the economy emerge out of the gap. As exemplified on graph C an increase in money supply from point 1 to point 2 caused the supply of money for loans to go up which also caused the interest rate to increase from point 2 to point 1. Also the investment in market goods shown in graph B goes up as the interest rate falls because the interest rate and the quantity of investment are inversely related. .
             In graph D the keynesian model is displayed in which an increase in investment causes spending to increase which also shifts the aggregate demand cure over to the right this is all assuming that the aggregate supply curve is horizontal. As corporations employ more workers for maintaining and producing in their factories the unemployment rate falls causing a problem clearly exemplified by the Phillips curve on graph F where the very low unemployment is associated with high inflation and high unemployment associated with low inflation.


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