The Opposites...

This discussion between the Fed and the government over the use of fiscal-spending to increase demand and growth within the economy has turned out to be the point of contention. The Fed Chair’s view is that the spending is not opportune as the economy is near full-employment and more spending would increase over-heating and probably would force it to increase nominal interest-rate before than expected which might be true because at this time it would mean debasing of the currency which is a pet issue amongst the policy-makers, higher inflation is seen as negative for the value of money and demand.  But, the economists favour lower real-interest-rate or natural-rate which means lower value of debt, however they forget that lower prices would increase that value of money and more savings due to lower-prices could help maintain lower nominal-rates and real-interest-rate if the economy is below full-employment and price-level is low. Fiscal-spending at this level would increase expected inflation because we have signs of wages firming up because of full-employment. Nonetheless, higher inflation and inflation expectation could increase export-competitiveness in the short-run, but at the cost of lower domestic real-wages and higher nominal exchange rate and lower-imports which may increase exports, but is not suggestible since domestic demand could go down. Lower consumption means lower domestic-welfare and depreciation would increase capital outflows that means domestically less investment could lower  inflation and interest-rate expectations which is the opposite of what the policy-makers want. They want higher inflation and interest-rate to come-out of the liquidity-trap, the opposite. However, if the Fed targets lower-prices and interest-rates it might increase expected inflation and interest rate and expectations by increasing demand. They are targeting higher inflation, but inflation would increase when demand increase and that is dependent on real-wages and income which higher inflation might push down. Keynesians too believe that effective-demand during slowdowns would increase if employment and wages increase. The Fed has committed a higher inflation target and has also target higher real-GDP, but other things constant, if inflation increases, it would reduce real-GDP because of a higher deflator. Higher inflation would increase the value of  deflator when GDP is constant. So both, the signals to target higher inflation and higher GDP are half conflicting. Notwithstanding, if we try to keep inflation constant or lower with a higher real-GDP target that might increase the GDP when the money-supply, demand, output and income increase… If we commit higher inflation it would also lower real-GDP expectations if other things remain constant…