How does consumer confidence interact with public policies when in a recession? How about in a boom? Does it make policies more effective or less effective in achieving economic stability? Why?
When there is low confidence, like in a recession, the money supply is increased, which lowers interest rates and raises the demand for the funds. This helps to stimulate the economy by raising the output. When confidence is high, the money supply is lowered in order to raise the interest rates to lower the demand for the aggregate funds. I thought the quote on p. 471 of our textbook, from William McChesney Martin was pretty funny and this seems to be true, “The Federal Reserve’s job is to take away the punch bowl just as the party gets going.”
The policies seem to be less effective than they are meant to be. The lag in prices and wages catching up to the current demands of funds and output of product tend to affect the stability of the market in the short run. The government might be better off planning for steady growth of the money supply and looking at the long run instead. Fiscal policy also takes a long time to get passed. It has to go through both houses and in front of the President to be approved before it will be in action. By the time all of this happens, the economy often makes its own shift closer to what the bill was trying to achieve. It seems like a waste of money and time to try to change economic policy at the governmental level if things naturally come to an equilibrium.
My Journey into Macroeconomics 