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Rock Bottom Economics

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In the New York Times opinion-editorial piece, “Rock Bottom Economics; The Inflation and Rising Interest Rates That Never Showed Up,” by Paul Krugman, Krugman emphasizes how shocking it is that an interest rate set six years prior remained constant and how even more shocking it is that our economic discourse has been so reluctant in realizing the “new reality.” He explains the changes to the economy after it has “hit rock bottom” and what was said to be the blame of this longstanding issue. Krugman then concludes that the cause of this economic standpoint is directly related to the ignorance of those who have the power to shape policy.
Krugman claims that after the Federal Reserve cut interest rates to an all time low, there became a new reality that those with economic power are having a hard time believing it. The reality being that when an economy is in a liquidity trap, everything changes. Krugman is correct in stating that everything changes because in a liquidity trap, monetary policy is ineffective. In this case, consumers tend to save their funds in belief that interest rates will soon rise. One way to decrease inflation is to increase interest rate. To do so, the Fed would need to take money out of circulation which reduces supply of money, making it costlier to borrow …show more content…
Being in this state, structural reform will more likely destroy jobs than create them, according to Krugman. Although his statement has many possible counterarguments, he does admit that it was both radical and wild. He then defends his argument by using the examples of the U.S. economy during The Great Depression, where unemployment rates increased from 3% to 25% and the lessons of Post-Bubble Japan, which caused unemployment rates to fluctuate. He also defends his argument by claiming that modern economic analysis would agree, even though policy makers would

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