Fiscal and Monetary Policy in a Fictitious Economic Scenario
Recently, all of Wall Street waited with bated breath for Allen Greenspan to announce what would be the shift in the Federal Reserve's upcoming policy regarding interest rates, given that our national economy was apparently recovering at a much stronger than expected pace. Dismayed at the news that the Fed was likely to raise rates, thus encouraging saving and tempering consumer spending, the stock market temporarily took a nosedive. It was speculated that this information might have been leaked, to assess Wall Street's reaction to a possible rate hike. The Fed retracted its position, slightly.
This recent dialogue of public relations and monetary policy highlights the impact even suggestions by the federal government and the Federal Reserve chairman regarding national fiscal and monetary policy respectively can have upon the nation. Fiscal policy is the use of government spending and taxes to stabilize the economy. Monetary policy is the use of the money supply and credit to stabilize the economy.
Now consider the following fictitious scenario. The United States economy's GDP or Gross National Product growth is at approximate 1.5% and has been at approximately this level for two years. As a means of comparison, during the 2001 recession, GDP hovered at 1%. (Herman-Elkin 2003) The inflation rate, as measured by both the CPI and the GDP deflator has been at approximately 1-2% for the last two years. Again, as a means of comparison, during the 2001 recession, inflation also hovered at 1%(Herman-Elkin 2003) In the fictional scenario, unemployment has recently moved to 7.3% up from 7% one year ago, and 6.5% 2 years ago. The federal funds rate target is 3.5% and the discount rate is 3.25%. The government's budget has been operating at a deficit of approx $60 billion for the last year, up from $50 billion...
Fiscal and Monetary Policy and Economic Fluctuations The global economy was relatively doing fine more than five years ago before it was hit by economic downturn or recession. During this period, the American economy was at its peak, particularly in the fourth quarter of 2007. However, this was followed by a mild recession at the beginning of 2008, which eventually turned into a severe credit crisis across the world approximately one
Fiscal and Monetary Policy How is a recession defined? Is the U.S. currently in a recession? Explain. The National Bureau of Economic Research (NBER) "is widely recognized as the arbiter of starting and ending dates of U.S. recessions" (Burtless, G. April 19, 2010). As such, NBER indicates, "recessions start at the peak of a business cycle and end at the trough; and are a significant decline in economic activity spread across the
Monetary Policy Discuss some of the major determinants of the demand for money by sector and in total. Discuss some differences in the demand for money which might exist for countries other than the U.S. An effective formulation of the Monetary Policy depends on the determining factors of the demand for money. Money Demand acts as a channel on transmission mechanism for monetary policy. Therefore the consistency of the money demand function
While this represents a significant portion of the government's operating income, higher inflation would generate even more seigniorage by requiring larger volumes (or simply higher denominations) of currency in circulation. If prevailing annualized inflation rises above 4.6% but remains below 9.0%, real seigniorage could climb to $130 billion, or about 6% of all federal receipts in a year like 2009 (U.S. Financial Management Budget). In itself, cash carries an interest rate
Monetary Policy Any change in the central back policy or the bank reserves, which is made to influence the interest rates and thus the investment, employment or production, is called the monetary policy. If the monetary authority wants to increase production, they need to increase the bank reserves. The bank then expands the money supply, which in turn reduces the interest rates. Monetary policy is one of the tools that a
Monetary policy is crucial to the economy and impacts all types of economic and financial decisions individuals make. For example, depending on the state of the economy, individuals may decide whether to obtain a loan to purchase a new car or house or to start their own company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in
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