Final answer:
Officials keeping interest rates near zero until the unemployment rate drops to 6.5% are using an Easy policy to stimulate economic growth and investment. This policy can lead to short-term decreases in unemployment but may result in higher inflation in the long run. Examples of such policies include the responses to the 2008 financial crisis and the COVID-19 pandemic's economic impact.
Step-by-step explanation:
When officials decide to keep interest rates near zero until the unemployment rate drops to 6.5%, they are using an Easy policy. An easy money policy, also known as expansionary monetary policy, is designed to stimulate economic growth by lowering interest rates, making borrowing cheaper, and thereby encouraging businesses to invest and consumers to spend. The opposite is a tight money policy, which involves raising interest rates to combat inflation.
Currently, when a government maintains low interest rates, they do so to encourage spending and investment in the economy, which can help reduce unemployment. However, persistent low-interest rates can also lead to higher inflation in the long run. A neoclassical perspective would suggest that in the short run, this policy might decrease unemployment, but in the long run, it can lead to higher price levels without affecting the natural rate of unemployment or potential GDP.
Recent historical examples include the actions taken by the Federal Reserve during and after the 2008 financial crisis and the monetary response to the economic impact of the COVID-19 pandemic in March 2020. Both instances involved reducing the federal funds rate to near-zero and implementing quantitative easing to stimulate aggregate demand.