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The Fiscal and Monetary Policy and Economic Fluctuations

Words: 1164
Paper Type: Essay
Subject: Economics

The current economic situation in the U.S. as compared to five (5) years ago

Over the years, the United States of America that operates in a perfect market has been recording sound GDP levels compared to other states globally. However, the nation has been facing severe economic challenges, especially after the global economic crisis that occurred in 2008, including various administrative challenges (Perlo, 2012).

Currently, the economy has not fully recovered since interest rates, inflation, and the state of unemployment remains high compared to 5 years ago. In particular, the rate of joblessness in the US still stands at 7.9% as reported in the latest study conducted by the US Bureau of statistics compared to 4.5% unemployment rate reported in 2007 (Dudley, 2013).

Despite the huge gap that is evident between the periods under study, there is hope that the rate would reduce further based on the fiscal policies that are being put in place (Perlo, 2012). This is apparent since the rate had currently come down from 9% in 2008 and it remains steady at 7.9% with possibilities of improving.

Variably, the current inflation rate that stands at 1-2.5% is high compared to the prevailing rate five years ago, that stood at 0-1.1% (Dudley, 2013). Consequently, the interest rate in the country has also increased to about 2-3% compared to the prevailing rate in 2007. The evident increase in interest and inflationary rates are attributable to the financial crisis witnessed, and some administrative issues that were propelled under the last administration.

The changes in interest rates, inflation, and unemployment and the reason for each of the changes

Although the state of the US economy is improving various imperfect economies, it has not reached the level it was five years ago. This is evident since inflation, unemployment, and interest rates remain high. In particular, the increase in the unemployment rate that stands at 7.9% currently was caused majorly by heavy job cuts that were witnessed during the financial crisis. Most companies laid off their workers during the time to break-even and sustained their operations.

Although the situation worsened in 2008, the corrective fiscal policies that the government has been adopting, such as the provision of financial support are beginning to yield fruits. Secondly, the evident change or increase in inflation has also been occasioned by the crisis since it led to huge job cuts, reduction in income power, and interest rates that have been impeding the acquisition of loans.

High inflation shows that money has been losing its purchasing power over the years since the crisis occurred. That is individuals purchasing power has been compromised due to low-income levels. Money has also lost its strength over the years.

Consequently, the increase in interest rates that are charged by various institutions such as banks is also attributable to poor economic performance or economic downturn. Scholars explain that the economic stability of a country determines the level of the interest rate. When the economy records dismal performance, the interest rate is bound to increase. This explains why interest rate increased since the crisis occurred (Dudley, 2013).

Strategies based on fiscal and monetary policy that would encourage people to spend money to create economic growth

To correct the existing imbalances that are caused by high inflation, interest rates, and unemployment and make people spend more, US government needs to put in place requisite measures that can help in improving the economy (Gosling, 2007). The government should consider reviewing its economic policies or adopt viable fiscal and monetary policies to facilitate the growth of the economy to make it sound as it was five years ago.

Key fiscal strategies that the government can adopt to enable people to acquire and spend more money include reduction of interest rates and the creation of more jobs or driving the nation to full employment. In particular, driving the nation to full employment will help in reducing the inflationary gap since most individuals will have a source of income.

It will enhance an individual’s propensity to consume that will, in turn, lead to the reduction of inflation. They can do this by increasingly bailing out companies to enable them to have the capacity to regain their performance levels and hire more people. Secondly, they can also reduce the cost of business to enable employers to divert more cash into employing locals (Gosling, 2007).

Similarly, the government can create employment by giving grants and loans to entrepreneurs to open up businesses and in turn, create jobs. Consequently, lowering of interest is appropriate in boosting the economy. The monetary policy is vital since it holds the capacity of lowering the cost of business and acquisition of loans from banks.

This strategy is essential in correcting inflationary gaps by ensuring that an individual’s income levels increases. The strategy ensures that banks reduce their lending rates to enable more people to acquire loans to foster development and get more money to spend and expanding the economy. These strategies hold the capacity of improving the economy and bring it back to its prior performance levels.

How they would affect unemployment, inflation, and interest rates

Imperatively, the two strategies will help in providing credible solutions to the economic challenges that the nation has been experiencing for the last five years. They will ensure that more jobs are created, more money is obtained and that inflationary gap is corrected. For instance, the reduction of interest rates will help in reducing the inflation rate by making money to regain its value in the economy.

Similarly, it will facilitate the creation of more employment since the borrowed money will be used in running business ventures (Gosling, 2007). Additional, it will ensure that interest rates are reduced further since demand will increase. Job creation is another strategy that is essential in ensuring that economic complications are corrected. The strategy is normally used to correct inflationary gap challenges such as unemployment and high interest rates.

The strategy is bound to correct unemployment issues and improve individual’s income levels in the US because it works well in perfect markets as compared to imperfect markets. Therefore, it will help in correcting interest rate challenges and make inflation rate that stands currently at 1-2.5% to reduce drastically since unemployment is a key factor that influences inflation.

Understanding of the imperfectly competitive markets

Fiscal and monetary policies also enable various imperfect markets and economies to correct the emerging imbalances that are caused by changes in inflation, interest rates, and unemployment. In particular, they provide relevant incentives that enable oligopolistic and monopolistic players to manage their economies very well by ensuring that they adopt policies that promote effective profit maximization (Gosling, 2007).

Strong fiscal and monetary policies are important in such economies to safeguard the interest of the locals since such markets subject individuals to the high cost of living. This is apparent since the money easily looses its purchasing power in such economies, hence increasing the level of inflation.

References

Dudley, W. (2013). The Economic Outlook and the Role of Monetary Policy. Web.

Gosling, J. (2007). Economics, politics, and American public policy. Armonk, N.Y: M.E. Sharpe, Inc.

Perlo, A. (2012). The US Economic Situation and the 2012 elections. Web.