Monetary Policy The Fiscal and Monetary Policy and Economic Fluctuations

The current economic situation in the United States is far different than it was 5 years ago. In 2010, the economy was very stale. The stock market was low, the housing bubble had popped, and unemployment figures were high (Schwartz, 2015). Now, while there are still serious and important issues with the U.S. economy, the general trend is for growth and recovery (Harlan, 2015). Interest rates on mortgages and other purchases have stayed low, allowing for people who want to buy homes -- especially for the first time -- to afford them. Home prices, though, have started to slowly rise, at least in many areas of the country. That is good news for sellers, because it has given them the opportunity to sell their homes at prices that are reasonable to them, so they can get out from under their mortgages and move on with their lives. As prices rise, some buyers are priced out of the market. With the consistently low interest rates, though, most buyers who were able to buy in 2010 are still able to buy in 2015.

Housing prices and interest rates are not the only areas of the economy that are seeing improvement, though. Inflation has not changed much in the last five years, which has kept prices from rising too quickly on consumer goods (Bloomberg, 2014). While inflation generally always continues to grow, the slowed growth of it has helped ensure that people who need to be able to afford to survive can still do so. Now that the economy is recovering from where it was in 2010, though, inflation will likely be on the rise once again, and at a more rapid rate than was seen in the last five years. If that takes place, it could make it more difficult for people to afford the basic necessities of life, and could also affect large purchases, such as houses and cars. Even though changes in the last five years have been slow, that does not mean changes will continue to be that way (Schwartz, 2015). Economic fluctuations are to be expected, and those fluctuations do not always trend to the positive.

There are several reasons for the changes in interest rates, inflation, and unemployment that have been taking place between 2010 and 2015. When it comes to interest rates, the decision not to raise them was made because raising them would have further harmed the economy. People who needed to buy homes, cars, and other items on credit were finding that interest rates were too high for them to be able to make their purchases. A lack of purchasing power is a death knell for the consumer and the economy in which he or she lives and works. Seeing this, interest rates were lowered after the housing bubble popped, as a way to encourage people to buy homes again (Schwartz, 2015). With the low housing prices and the lowered interest rates, more people were able to buy than ever before. Unfortunately, the lowered interest rates were not helpful to everyone, as sellers found that the prices of their homes had dropped too much for them to get out from under their mortgages, even if they had a willing buyer.

With appraisal values low, many homes ended up in foreclosure or short sale status, which failed to help either buyers or sellers. However, interest rates were not the only concern. The unemployment rate mattered, as well. People who did not have a job found that getting one was increasingly difficult, and many people who had jobs suddenly found that they were laid off because there was no more work for them, and their company could not afford to pay them anymore (Harlan, 2015). The more the unemployment rate rose, the more the economy suffered, because it was increasingly difficult for people to afford anything. When the buying power of consumers goes down sharply because of a lack of employment and income, that can significantly harm the entire economy of a nation. Inflation, as a result of a lack of economic growth, mostly fell flat (Schwartz, 2015). When the growth of the economy is strong, inflation generally rises at a proportional rate. Since there was so little growth, there was also little inflation. That was, perhaps, the only bright spot in the U.S. economy in the last five years.

There are different strategies that are used to get people to spend money, so that the economy can grow. One of the largest of these is to lower interest rates. By doing that, it becomes easier -- and less expensive -- for individuals and companies...

Most of the time, the interest rate a person is charged on something is tied to the prime rate. If the prime rate goes up, interest rates go up. Conversely, a lowering of the prime rate means that the interest rates across the board will generally go down (Bloomberg, 2014). When the interest rate is lower, people have more buying power (Schwartz, 2015). So do corporations and other entities, which can lead them to borrow against assets to keep growing and moving forward. By doing that, they may also be able to keep more of their workers employed. In short, that allows them to avoid laying off people, so the unemployment rate does not start to rise. People who stay employed can also take advantage of the lowered interest rates by purchasing goods and services on credit, thereby keeping the economy stronger.
Another policy that can be used in order to create economic growth is to provide stimulus packages and other incentives to companies and corporations. If these entities fail, there will be a lot of people out of work and a lot of harm done to the economy. It is often better to help these companies out, so they do not end up struggling to stay afloat. That can help avoid rising prices, can mitigate or even completely stop layoffs, and can help companies that are concerned that they may have to close their doors find a way to stay open (Bloomberg, 2014). A government bailout might not be the ideal situation for a company, but it is generally better than simply closing up. Especially if the company is a large one, there can be a lot of economic damage done to a society when the doors of the company are closed. It is not just about people losing their jobs, but also about people losing out on the goods and services that were being provided by the company when it was open for business.

Reducing the interest rate and bailing out companies both have effects on the unemployment, inflation, and interest rate numbers of any society or country. A reduction in the prime rate will, in turn, cause the overall interest rates that companies charge to be lowered. That can allow more people to buy things on credit, and buying things stimulates the economy and helps it to keep growing. The interest rate being lower can also help the unemployment rate, too. When companies are able to borrow at lower rates, they can get money less expensively and use that money to stay afloat (Schwartz, 2015). That keeps people in their jobs, and avoids a lot of problems like layoffs. With that in mind, it is very important to consider what the lowering of interest rates will do to inflation. When the economy is booming and people are buying, the rate of inflation is also rising. Helping the economy stay strong is important, but giving that economy too much encouragement could mean that the rate of inflation rises too quickly.

Bailing out corporations and other companies so that they do not close their doors also has an effect on unemployment and inflation numbers, but has little effect on the interest rate. When companies have to be bailed out, it is a sign that the economy is really struggling. These bailouts, though, are good for the economy in a couple of ways. First, they keep people employed, and that helps to keep the unemployment numbers low. Lower unemployment means that people have more buying power, and that means a stronger economy, overall (Bloomberg, 2014). While that can mean rising inflation, if the economy is bad enough that companies need bailouts, the idea that inflation will rise quickly is really not that much of a concern. A slow rise of inflation is to be expected in that kind of case, though. One area where a bailout does not have much of an effect is in the interest rate seen. Bailing out companies can help those companies and the overall economy, but it really has few ties to the interest rates that are offered to companies and corporations throughout the country.

References

Bloomberg News (2014). Factories charge ahead to propel U.S. into 2015: Economy. Bloomberg Business. Retrieved from http://www.bloomberg.com/news/articles/2014-12-15/industrial-production-in-u-s-increases-by-most-since-may-2010.

Harlan, C. (2015). U.S. economy added 295,000 jobs in February. The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/06/u-s-economy-added-295000-jobs-in-february/.

Schwartz, N.D. (2015). Growth rate put at…