Author(s)

RICHARD G. CARRANZA

Abstract

The economy is modeled as an engineering pumping system. At the start, no control is used; thus, the open-loop system is established. Flow, or analogously GDP, is sent from a pump to a storage tank (analogously, inventories). Control is then applied where investment (flow out of the tank) is controlled via the interest rate. Thus, the open loop becomes a closed loop. It is shown from simple example that frequent government interference in the economy causes more instability than less government interference. Dynamic systems tend toward steady-state systems and government interference should be very selective and careful. In this work, the interest rate is used to control the economy by the Federal Reserve, ceteris paribus. Simulations indicate that when the Fed attempts to control the economy using interest rates, the net effect is that economic equilibrium is delayed with respect to an economy that comes to equilibrium naturally.

Keywords

consumption, control, economics, feedback, investment, loop, macroeconomics, savings