Economy

If the Fed hold the growth rate of money supply constant while the government expenditures are having an expansionary impact on the economy then interest rates and private spending will reach disequilibrium. With the quantity of money demanded greater than the quantity of money supplied causes interest rates to rise. The increase in interest rates causes the planned investments spending to decline which means reductions in private investment spending (crowding-out effect)
The Fed tool of monetary policy may be ineffective in bringing the economy out of a recession. Low interest rates may not encourage higher levels of aggregate expenditures if economic confidence is low. It may be drawn out as long as two years if people...