In 1929 when the American economy slid into recession, economists primarily relied on the classical theory of economics that was based on a promise that the economy would self-correct in absence of government interference. However, no correction occurred and hence the recession deepened compelling the economists to revise the theory in order to come up with the one that allowed the government to correct inflation and recession in the economy. The growth of government since the 1930s has been accompanied by steady escalations in its spending. Nowadays, keeping the inflation and unemployment as low as possible are the two most important goals of the government as well as the Fed. Also, at the same time, the government and the Federal Reserve have to ensure that the country’s GDP increases at average of 3%. This can be achieved through the use of the fiscal and monetary policy. When used in the right manner or mix, these policies can stimulate the economy and slow it down when it heats up. The logic of this can be depicted by the Phillips curve that shows that expansion of wages in growing economies tends to more rapid than normal for a given period of time. A permanent balance between employment and inflation that often results in long-term prosperity can only be realized through implementation of the right policies. When the country’s economy is performing poorly; for instance, when there is high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year, the fiscal and monetary policy can be used to adjust these numbers to somewhat acceptable limits. In such a scenario, an expansion in fiscal policy would suffice to correct unemployment and low GDP by encouraging gove... ... middle of paper ... ...o-GDP ratio, often expressed as a percentage, is a comparison of what the country owes to what it produces. It is the measure of a country’s ability to pay back its debt. A high debt-to-GDP ratio can make it hard for a country like United States to pay its external debts, and may lead creditors to seek higher interest rates when lending. This can affect the Fed’s ability to implement monetary and fiscal policies, for instance, it curtails the ability of the central bank to participate in open operation market. Consequentially, higher risk of default accompanies higher the debt-to-GDP ratio because the country might not pay its debt back. Currently, Americans are facing the threat of increased price inflation as the public debt (90 percent of the GDP) threatens to crowd out private investment and drive interest rates up, and thus leading to slowed economic growth.
Throughout Eveline Adomait and Richard Maranta’s Dinner Party Economics there is continuous discussion surrounding the problems that economies face around the world and the various methods that can be used to alter the state of the current economic conditions. Changes in consumer spending patterns can become a problem for the economy as a whole, potentially resulting in over-inflation or recession. Implementing discretionary policies such as monetary policy through changing interest rates, and fiscal policy through taxation and government spending, makes it possible to fix these economic problems.
...uilibrium in public finances and distorted tax system particularly rely on seignorage. More specifically, fiscal policy has a significant effect on inflation in countries where government securities markets are less developed. In this connection, Telatar, Telatar and Ratti (2003) argue that term structure contains important information about future inflation and therefore can be used as a guide for initiating monetary policy to target price stability. According to their study, short-term borrowing at high interest rate stimulates re-borrowing in order to repay the debt services, thereby creating a viscous circle of high budget deficits and high interest rates. Since political weakness is one of the major reasons to this chronic and high budget deficit and inflation, the development of stable political institutions is therefore necessary in order to stabilize prices.
Looking back to the Carter and Reagan Administration’s, you can begin to see where the Recession originated from. Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation. Political pressure favored stimulus resulting in an expansion of the money supply. Reagan wanted to increase defense spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in combination with simplified income tax codes and continued deregulation. During Reagan's presidency the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under President Carter. The real
“GDP is the most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.” (Thapa.R)
Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.
Public debt, which comes from securities and bonds issued by the United States Treasury, is responsible for over 60 percent of the debt (“Debt Position and Activity Report” 1). These debts are being held by the public inside and outside the US. Over 25 percent of the debts are held by foreign governments, in which China and Japan accounts for almost half of the sum (“Treasury Bulletin: September 2009” 60).
The U.S. National debt affects consumers every day, but probably most notably in Americans facing higher taxes, higher interest rates, and the U.S. government cutting back on services, weaker job markets, and lastly inflation. The national debt exists as a result of government shortfalls, or deficit budgets in which the government's expenses exceed its revenues. Internal debt includes the amount borrowed from sources within the country. The government raises this money by selling bonds, bills, securities, and government. Along with internal debt, countries are also likely to have external debt. External debt is the money borrowed from foreign sou...
This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
When it comes to dealing with the recession, there are usually two main schools of thought, Trickle-down economics and Keynesian economics. Trickle-down economics, also known as Supply-side, focuses more on slashing taxes to helping the rich who in turn help the poor. Where as Keynesian economics puts more emphasis on government spending to help stimulate aggravated demand. Aggravated demand simply means the total amount of goods or services demanded at a certain time. Keynesian policies were developed in the 1930s by the British economist John Maynard Keynes. Until this time classical economists believed that there was a natural boom-bust cycle to the economy that was modest and self-regulating. For the most part they were right. That is until
Employment situation and economic fluctuation can affect the stability of the country. Australia is experiencing the highest level of unemployment in more than 10 years now. The reasons that contribute to the situation include less confidence in future economic conditions and the reduction on mining investment. A high unemployment rate can damage social stability and hider economic growth. The demand of labour decrease and the quantity of labour employed decreases. In order to stop unemployment aggravating, the GDP growth rate should be above 3 percent. The government have tried to solve the problem of unemployment with expansionary fiscal policy and monetary policy. However, the results are not satisfactory. The government can stimulate employment by increasing government spending and forward guidance for the public.
The current debt trend as it is has the United States gaining about $1 trillion in debt yearly (http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm ). America’s GDP as of 2010 to the present is $17.914 trillion yearly. The current total national debt as of 2015 is estimated at $18 trillion, with the majority being held by foreign countries at $6.013 trillion. The second largest holders of total national debt are Social Services and Federal Disability Insurance Trust Fund at $2.783 trillion. Another cause of the increase of national debt is spending deficits, at $439 billion over Federal yearly receipt; this number is projected to exceed
A problem I would like to solve is how to improve the economy in the United States as a whole so the lower and middle class can afford the bills, create more job and essentials and taxing the rich so more people make money since the rich already have a lot of money. In today’s economy many people do not have a job which is why the unemployment have been high for the past several months and it just keep increasing month by month. Because of this many parents can give their kids to go to college since the tuition keeps increasing every year in the United States. This is something that have battling my mind the past several of how to improve the economy. The United States is facing economic disaster on a scale few nations have ever experienced.
Many countries in the world have been suffering a recession in their economies and UK has not been an exception. A recession is a macroeconomic term describing one of the two business cycles that economies go through. The business cycles is characterized by either a boom where there are more business activities carried with a rapid economic growth and points of recession where there is retardation min economic growth. Various aspects and factors contribute to economic growth, which is measured through GDP. This factor may include savings, investments government spending plus other factors within either an increase or a decrease. Reduction in spending may lead to a recession while a n increase in spending may lead to expansion that is a boom in the economy.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,