The Fiscal and Monetary Policy and Economic Fluctuations - Essay Example

The Fiscal and Monetary Policy and Economic Fluctuations al Affiliation Discuss the current economic situation in theUS as compared to five (5) years ago. Include the interest rates, inflation and unemployment rate in your explanation. The United States’ economy is growing but at a very slow pace of as low as 2% annually (Davidson, 2014). It is now five complete years after the collapse of Lehman Bros and the subsequent financial crisis that led to the great recession. This historical upheaval had great impacts that are felt in most parts of the economy today.

The recovery from the great recession was started in June 2009 and ever since, important strides have been made in the job market. The economy has seen the slowest growth since the Second World War. The Federal Reserve and the Congress intervened to rescue the bleeding economy in 2008 and 2009 through a bank bailout, low interest rates, and an economic stimulus. However, the slow recovery can be attributed to the reluctance of banks to lend and the intention of consumers and businesses in line with shedding debts of trillions of dollars.

Over the past five years, the economy has seen a 9.2% expansion after proper adjustment to inflation (Davidson, 2014). Consumer spending has been significantly crimped by the credit crunch making up to two-thirds of the US economy and rising at an annual rate of 2.2% during the entire recovery phase. The rate of unemployment has fallen to a low of 7.3% from its highest rate of 10% as registered in 2009. 2. Explain the changes in interest rates, inflation, and unemployment rates that you researched.

Initially, the interest rates experienced changes aimed at pulling the economy from the grip of the recession’s aftermath after the bubble of housing burst (Tucker, 2014). The country has experienced low interest rates from 2009 until present. Keeping the interest rate low was aimed at increasing the consumers buying power as this would increase the revenues poured into the economy. Increased revenue generation was bound to increase the opportunities for creating more jobs and subsequently reducing the unemployment level all through the nation.

However, with a view of the current state of the economy, it is important to know that an increase in the interest rates is inevitable. An increase in the interest rate would highly benefit the economy in the midst of a steady economic growth. In 2009, during the great recession, the US experienced a deflation rate of -0.34%. However, the rate picked up in the following recovery years with the rates of 1.64%, 3.16%, 2.07%, 1.47%, and 1.62% being experienced in 2010, 2011, 2012, 2013, and 2014 respectively (Tucker, 2014).

These changes in the inflation rates show a decrease, implying that the consumer has been given more buying power. According to the present day economic state, there is a decrease in the cost of living, an aspect that can be attributed to the quest to recover from the great recession. The increase in job opportunities can be explained by the increase in low industry and part-time jobs including home health care, restaurants, and retail. However, the decrease in the manufacturing, office support, and maintenance jobs is wanting as most middle-class manufacturing jobs have been replaced by machines and computers (Tucker, 2014). 3. Identify two (2) strategies based on the fiscal and monetary policy that would encourage people to spend money in order to create economic growth.

Fiscal policy involves fluctuations in government spending and taxes, which have an impact on the GSDP level (Langdana, 2009). On the other hand, monetary policy involves the actions of Federal Reserve in influencing inflation or GDP level. One of the strategies employed by the government is tax cuts, which increase consumer buying power. As a result of these tax cuts, families keep more income and subsequently create more opportunities to use the money for services and products that would allow them to generate more revenue; hence enhancing the economy.

In addition, this strategy allows the government to channel revenue in infrastructure including construction of schools and roads (Langdana, 2009). Such an approach reduces the rate of unemployment by creating opportunities for employment. In terms of monetary policy, the Federal Reserve Bank is employed by the government in controlling the management of cash supply. This is important in controlling the inflation rate. The interest rate is managed by the Federal Reserve Bank to allow for an increase in the consumers purchasing power.

As such, more revenue is generated to boost the economy (Langdana, 2009). 4. Explain how the two (2) strategies that you identified in Question 3 could affect the unemployment, inflation, and interest rates. Through spending of revenue on infrastructure projects, the rate of unemployment is reduced as more jobs are created all over the country (Langdana, 2009). The Federal Reserve Bank regulates cash flow and thus promotes economic growth. As a result of regulating the amount of money that is within the economy, the government can determine the inflation rate.

This information is also utilized by the Federal Reserve Bank in determining the interest rates that ought to be achieved in order to allow for the continuous contribution of each household to the economy through purchases made (Langdana, 2009). Nevertheless, it is important for the government to ensure that the monetary and fiscal policies are managed collaboratively in order to achieve economic stability. Poor decision making in the implementation of the monetary and fiscal policies can negatively affect the economy and in turn affect the inflation, interest, and unemployment rates.

References Davidson, P. (2014). Growth continues, but at a slow pace. Retrieved from USA Today: http://www.usatoday.com/story/money/business/2013/09/10/economy-2008-financial-crisis-lehman/2789841/ Langdana, F. (2009). Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. New York: Springer Science+Business Media, LLC. Tucker, I. (2014). Survey of Economics. Boston: Cengage Learning.