Monetary Policy

Upon viewing the simulation, we gather that the monetary policy is not effective since the demand for loans is shrinking, although it is at a low interest rate. Much like JapanЎ¦s recession in the 90Ў¦s, there is too much money in the market. Demands for investment is low and therefore demands for loans decrease as well. The recession in Japan was a prime example of a non-stimulated market when investors were unwilling to borrow even though interest rates were at 0%. Lowered interest rate will not recover the economy. If this situation prolongs, a wave of panic through the population will ensue and deflation may occur since the public is consuming, rather than spending.

The ultimate risk of slowing inflation is that it may cause a recession. Slowing inflation also causes unemployment to rise, GDP and interest rates to drop proportionally to inflation, and the reserve ratio to increase. The increase in reserve ratio will cause less return for lenders.

To mitigate these risks, interest rates must decrease in order to stimulate investment and for consumers to put their money in the market. By having an influx of investment in the economy, more jobs will be created, thus decreasing the unemployment rate.

Deflation must