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.
In Keynesianism, government uses fiscal policy, which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high, and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the amount of income that goes to financial responsibilities. When people have more money, they are able to spend more, which in return goes into jump starting the economy.
Since being founded, America became a capitalist society. Being a capitalist society obtains luxurious benefits and rather harsh consequences if gone bad. In a capitalist society people must buy products and spend money to keep the economy balanced, but once those people stop spending money, the economy goes off balance and the nation enters a recession. Once a recession drastically takes a downturn, the nation enters what is known as a depression. In 2008 America entered a recession and its consequences were severe enough for some people, such as President Barack Obama, to compare the recent crisis to the world’s darkest economic depression in history, the Great Depression. Although the Great Depression and the Great Recession of 2008 hold similarities and differences between the stock market and government spending, political issues, lifestyle changes, and wealth distribution, the Great Depression proved far more detrimental consequences than the Recession.
However the interest we pay on our nation 's debt is very small compared to the overall budget. According to the Center on Budget and Policy Priorities only 7% of the total budget is spent on interest which is relatively low compared to things like social security which took up 24% of the budget in 2014 (Policy Basics). As long as the United States can continue to keep the interest rates low the debt will continue to be a begin threat. If the creditors of the U.S. were to spike their interest rates, America would be in trouble, however America has fairly good credit, and it should remain that way unless there is another scare like the government shutdown in 2011 (Riley). Overall the threat of the nation debt is a very minute problem in the grand scheme of things. According to The Richest, only five nations in the entire world are completely debt free, which is astounding when you consider that there are about 195 countries in the entire world (Mathers; How Many). These figures show how extremely difficult it is for a country to run without having a certain amount of debt, and America having debt should not be a concern. America is not even in the top ten countries whose debt make up the majority of their GDP (Country List). Which means that at the moment American’s should not be overly
However, the absence of a strong centralized government only proved the theory that a crisis would erupt without it. During the Great Depression of 1929, the United States changed from a layered-caked federalist approach to one that endorsed a strong centralized government in an attempt to save the dwindling economy. In addition, a centralized federal system can also be beneficial to citizens during their plight to save the economy. Consider the events that occurred during Franklin Roosevelt’s and Lyndon B. Johnson’s presidential terms.
...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.
What caused the Great Recession that lasted from December 2007 to June 2009 in the United States? The United States a country with abundance of resources from jobs, education, money and power went from one day of economic balance to the next suffering major dimensions crisis. According to the Economic Policy Institute, it all began in 2007 from the credit crisis, which resulted in an 8 trillion dollar housing bubble (n.d.). This said by Economist analysts to attributed to the collapse in the United States. Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy.
All but four countries in the world has external debt (“Country Comparison: Debt External”). Having a debt is almost as common as having a mortgage. Since its establishment, The United States has always been in debt (“Historical Debt Outstanding – Annual”). The US national debt has had five sharp increases previously in its history. The reasons include civil car and the two World W...
The US government’s role in the Great Depression has been very controversy. Different hypothesizes argued differently on the causes of the Great depression and whether the New Deal introduced by the government and President Roosevelt helped United States got out of the depression. I would argue that even though not the only factor, the US government did lead the country into the Great Depression and the New Deal actually delayed the recovery process. I will discuss five different factors (stock market crash, bank failure, tariff and tax cut, consumer spending and agriculture) that are commonly accepted to cause the depression and how the government linked to them. Furthermore, I will try to show how the government prolonged the depression in the United States by introducing the New Deal.
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.
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.
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.
After analyzing the data and the theory, we have provided our conclusion weather tax cut is better for the stimulation of growth or Government spending is? This report explains the big macroeconomic debates of the present times. It seeks to explore the debate within fiscal policy itself between tax cuts and government spending. We have tried to explain the argument through some theories and through some data collected from Indian econ...
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
Inflation and unemployment are two key elements when evaluating a whole economy and it is also easy to get those figures from National Bureau of Statistics when you want to evaluate it. However, the relationship between them is a controversial topic, which has been debated by economists for decades. From some famous economists such as Paul Samuelson, Milton Freidman etc to some infamous economists, this topic received a lot of attention. However, it is this debate that makes the thinking about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing. But before started, it is worthy getting a better understanding of the terms, inflation and unemployment.
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,