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By late summer 2010, the target fed funds rate was between zero and 0.25 percent. At the same time, "animal spirits" were dormant and there was excess capacity in most industries. That is, businesses were in no mood to build new plant and equipment if they were not using their already existing excess capital. Interest rates were at or near zero, and yet investment demand remained quite low. The unemployment rate was 9.6 percent in august 2010.
VERSION A: Based on these conditions, discuss the effectiveness of monetary policy to promote expansion of the economy? (Please be very specific in your explanation and reasoning. That is, explain clearly and concisely what the policy choice involves in terms of specific actions, how it works in terms of which macroeconomic variables will be affected, how and why).
OR
VERSION B: Based on these conditions, discuss the effectiveness of fiscal policy to promote expansion of the economy? (Please be very specific in your explanation and reasoning. That is, explain clearly and concisely what the policy choice involves in terms of specific actions, how it works in terms of which macroeconomic variables will be affected, how and why).
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