Fed PolicyEconomists have been perplexed as to whether or not the Fed should begin its exit from expansionary monetary policy, primarily for the reason surrounding any policy change: There are benefits , and there are costs. Expansionary monetary policy essentially focuses on expanding the economy by increasing GDP, and this is done by increasing production and employment by lowering interest rates. With the economy slowly but steadily recovering, many economists believe the time has come for the Fed to exit its expansionary monetary policy; However, there are underlying issues that still need to be addressed, and diverging from this policy will bury these issues deeper. The Fed should not begin to exit loose monetary policy because there are employment issues that still need to be resolved. Although the objective of expansionary monetary policy to reduce unemployment has been achieved, the growth rate has been slow in recent years. answer. The unemployment rate “fell to 7%, an achievement considering it was nearly 7.8% in September (Lee, Unemployment Rate Hits 5-Year Low). Contrary to expectations, growth in the US economy has been described as “so meager that the economy, by some measures, is still very sick” (Mankiw, In Fed Policy, the Exit Music May Be Hard to Hear). The recovery today has been slower, partly due to the fact that the United States is a service economy, unlike economies in the past. In fact, “services have increased from 40% to 65% of production and from 48% to 70% of jobs” (Olney, More Services mean Longer Recoveries). When essentially more services are produced in an economy, g... middle of paper... interest rates and aggregate demand decrease. Since no good is being produced and there are no people employed to produce it, there will be a decrease in workers' disposable income and therefore a decrease in consumption because workers will be cautious about spending. As a result, unemployment will rise and inflation will fall because workers will be willing to work for lower wages – a situation that has also occurred in our economy. Conversely, when interest rates are low, the expected rate of return will likely be higher than interest rates and therefore banks will be more likely to lend money to borrowers. Unlike previous conditions, spending and production will rise while unemployment will fall, pushing inflation higher. This is due to the fact that producers pass on higher production costs resulting from higher wages to consumers.