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Macroeconomics - Essay Example

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Macroeconomics Macroeconomic factors such as unemployment rate and inflation play a pivotal role in the national economy of the country. Rapid inflation takes away the benefit of rising GDP or in other words brings down the real GDP growth rate and thereby real income of the people…
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Macroeconomics

Download file to see previous pages... Both are equally bad for the national economy. Current GDP, Inflation and Unemployment Rate The US GDP in year 2012 is estimated at 15.68 trillion. Real GDP in the US increased by 3.6 percent annually in the third quarter of 2013 over second quarter and the inflation rate is estimated at 1 percent in the month of October, 2013 that is lowest since October 2009. Similarly, unemployment rate is estimated at 7 percent in November 2013 down from 7.3 registered in the previous month (US Inflation Rate). Unemployment Rate in Past 10 years The following graph taken from the Bureau of Labor Statistics provides unemployment rates for last 10 years period in the US (Source: http://data.bls.gov/timeseries/LNS14000000). It is interesting to note that during boom period of economy between 2003 and 2007, unemployment rate continued to slide. Post financial crisis it began rising rapidly and went up to almost 10% during 2009 and 2010. As of now it is hovering around 7 percent. Inflation Scenario in Past 10 years The US Federal Reserve states, "Inflation is a general increase in the overall price levels of the goods and services in the economy" (Federal Reserve). The Fed takes into account several price indexes while calculating inflation. The monetary policy is governed by the Federal Reserve and it aims at achieving maximum employment, low inflation and moderate long-term interest rates. The following graph shows inflation rates for last 10 years in the US. Source: http://www.tradingeconomics.com/united-states/inflation-cpi It is amply clear that inflation rates vary significantly in last 10 years. During financial crisis, it touched to as low as -2 % in 2009 and prior to that it was at its peak at 6 percent in 2008. For last several quarters, the inflation rates are hovering between 1% and 2%. The Federal Reserve employs tools of monetary policy to control inflation and bring down unemployment rates as its major objectives. Monetary Policy Influences Inflation and Unemployment Usually, the Federal Reserve influences the federal funds rate that banks charge each other for short-term loans. These changes in short-term rates are eventually passed on to the businesses and households for their borrowing needs. Short-term rates also influence long-term rates such as residential mortgage rates, car loans etc. When the federal fund rate is reduced it triggers demand for goods and services. More demand for goods and services tend to generate more employment reducing unemployment rate that exist. Higher demand of the goods and services will also push the wage increase. Post 2007 financial crisis, the Federal Reserve took drastic steps to stabilize financial system and thereby the US economy. In this process, short-term interest rates were brought to near zero. Low interest rates aim at supporting businesses and households to finance new spending and thereby boost the economy and reduce the unemployment rate. However, in this process, there is possibility that inflation rate would also start going up. As far as inflation rate is within the targeted rate, the Fed rate will keep using the tool of lowering the interest rate to boost the economy and generate the employment. The moment inflation starts exceeding the target rate, the fund rate will move in the reverse direction to cool down the economy and thereby control the inflation rate (Monetary Policy). Post 2007 financial crisis, when the economy was shattered the Fed resorted to the ...Download file to see next pagesRead More
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