Essay On The Fiscal, Monetary Policy, And Economic Fluctuations
American economy was at its peak in 2007 in its fourth quarter of the financial year until a mild recession that later developed into a severe one for the top world economists developed. The primary cause similar to the one that stagnated the United States economy in the seventy's was the contradictory monetary policy from the Federal Reserve that insisted and reigned in high inflation. This recession was a major one that affected various, and most of the countries in the business as the markets were totally bear in stock (Floyd, 2012).
The recession in 2008 stagnated major players in the economy including China and Australia, however, the United States is in a recovery process and seems to be consistently on the upward move beating the other developed economies Germany included. The current Gross Domestic Product (GDP) of the United States is estimated to have increased by 2.5 percent, this is a small gap compared to the other major developed economies however on the market, the stock markets of America has stabilized its' ground much more than the market for the competitor countries.
However, much the American economy is substantially picking and on the rise it is notably at a very slow rate than expected. Uncertainty about future economic conditions comes out as an important and factor to consider that is clearly behind the slow growth of the United States' economy. Uncertainty has adverse effects on operations and the economy at large; its effects are similar to one caused by aggregate demand (House, 2014)
When uncertainty of future economic conditions raises the private sector usually responds by withdrawing and completely cutting off on their expenditures, reduced activity from these major players in the economy directly affects production quality and quantity there is thus reduction in output and similarly on inflation. In response to this, the policy makers especially on monetary lower the short-term interest rates while trying to mitigate the adverse effects of economy uncertainty, the same response when aggregate demand falls. Consequently, increase in unemployment.
After the recessions and drop on the entire economy of the United States, interest rates were significantly lowered in an attempt to revive the economy; by the end of 2013 the interest rates were at 1 percent and by now the rates are estimated to rest at 0.25 percent. On the other hand, the purchasing power of the same dollar, United States currency has significantly increased when compared with the past five years, this is according to the Consumer Price Index (CPI) which was estimated at $1.08 by 2013.
Although the unemployment rate is still above the standard accepted rate in the United States economy, it is slowly decreasing as the economy rates slowly come up. Since the recession years, back that seemed mild, it gradually grew up and caught America among other economy players with a surprise. The economy uncertainties that withdraw private investors in the business who are major players in a country's economy consequently lead to unemployment and low output. The rate of unemployment experienced in 2013 is on record to be at the highest rate in the economy of America.
Monetary policy has a huge impact on inflation and a country's economy condition at large, it influences the production and distribution process- goods and services that extends to the employees involved in this processes and, therefore, goes directly to finances regarding expenditures on households and firms; this is simply done by the federal adjusting its' funding rates.
The Federal Reserve primarily reduces the rates that banks charge each other for short-term loans; this pushes the banks to change the short-term interest rates that will directly affect borrowing costs for firms and households. The change in rates for instance reduced rates, firms will offer short terms loan at low-interest rates where their clients will benefit as it is cheaper to borrow, general spending, and prices are low therefore households increase demands for good which in return is income to the firms that can have the capital to expand their businesses.
The fiscal policy works on theories by a famous British Economist, John Keynes; the theory states that governments can influence macroeconomic levels of production by simply increasing or decreasing tax levels and general public spending. On an Economy affected by the recession and trying to pick up as the United States', the government should focus on tax increases and improve the general tax collections (Davidson, 2013).
High-income households and profitable business corporations that are least likely to spend should be targeted. Policy makers through the state should focus on extras like inherited wealth should be reinstated with taxes. Much of the country’s revenue is spent on picking up, on post-recession recoveries hence the policy makers should employ such strategies to improve the rate of economic growth by maximizing and improve tax collections as opposed to cut government funding on critical services of the community.
The state can consider policies on cutting on subsidies, invest in state priorities and make careful moves on all kinds of government spending. The government can implement correction measures and reforms and come with creative ways of saving money without necessarily compromising on the safety and general needs of the public. Instead of the usual measures of cutting budget expenditures, the state through policy makers can keenly scrutinize tax credits, exemptions and all the deductions by themselves instead of relying on consultants. (Davidson, 2013)
The move by Federal Reserve on funding; reduced interest rates have a connective effect to inflation. Reduced rates for borrowing prompts increases the rate of public borrowing hence rate of demand for goods and services goes up. Households are now in a position to demand most goods in the firms. There is increased money in circulation but at the same time with implementation of tax collection policies where high-income individuals and corporations are taxed more; there is a balance of general supply of money in the country.
Unemployment is slowly influenced by these strategies. The effect takes some time to be realized. Money in circulation because of reduced interest rates on short term loans enables the general public and gives them ability to invest in small and medium enterprises as a source of income which creates self-employment other than only relying on being employed; this in turn increases the revenue to the government and slowly improves the country's economy.
The government in turn will continuously spend this revenue on infrastructures with the aim of creating jobs to curb the unemployment. However, the flow of cash should be controlled, overspending on job creation may work negatively for the economy thus the Federal Reserve is responsible to control government spending and thus growth of the economy. Interest rates also have to be in constant consideration; the decision made to determine the rate of interests is important because households’ power to purchase has a great contribution to growth of the economy. Stability of the United States of a currently slow growing economy highly depends on management of the fiscal and monetary policies by the government.
Floyd Norris, In a five year Comparison, the US Recovery Fares Well. Published December 28, 2012
Jonathan House, US Economy Shrinks by Most in Five Years. June 25, 2014
Paul Davidson, United States of America Today. September 11. 2013. Web. Feb 20, 2015