This stems from the ideology of renowned British economist John Maynard Keynes, the father of the Keynesian economics model, which is premised on the “level of investment in the economy must exceed its savings rate in order to promote economic growth.”
If the economy is in a recession and everybody cuts back on spending including the government, then it creates a vicious cycle which further deepens the recession. Pam Woodall who created this illustration with a touch of humour gave rise to “Burgernomics” which remains relevant today. For illustration purposes, let’s compare an ala carte Big Mac in Singapore which cost S$6.40 versus Malaysia’s RM11.60. The implied PPP is 1.767.
For the longest time, the Federal Reserve have set an annual inflation target of 2%. Policy makers believe that a slow gradual increase in overall price level keeps businesses profitable and even prevent deflation. Healthy inflation is brought about by healthy economic growth. He did so regardless of opposition to overcome the wild inflation in the growing economy. It succeeded to bring inflation down to a moderate level but the side effect was an 18-month-long recession. Many industries like real estate and auto industry were affected, being a casualty of high interest rates.
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