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ming more expensive, the dampening of consumer demand for loan products such as mortgages as well as affecting the prices of residential real estate negatively. The rise in interest rates in the last five years can be attributed to the fall or rise of the money in circulation which has been common in the United States in the recent years. Increases rates have, in turn, led to inflation in the economy (O’Sullivan, Sheffrin and Prerez, 82).
Looking at the United States economic situation in the last five years in terms of inflation, interest rate and employment, questions have to be raised on what has been referred as the ‘greatest economy’. In the last five years, the interest rates in the USA have gone so low and this can be seen in the spike of the houses on sale. This condition has led to federal budget balance weakening to an extent that has never been witnessed for decades. This implies that the economy of the nation is completely off track. The rate of unemployment has rises from 4.5 % in 2007 and is now at 8.1 % (O’Sullivan, Sheffrin and Prerez, 78). High employment rates is one of the major indicators of how any economy is fairing and with the number of people actively looking for jobs increasing in the United States, the economy can be viewed as attenuating. This means that even businesses have lost the confidence of hiring employees again.
In an effort to create more employment opportunities, the federal government permitted rapid credit expansion. This led to the central bank to adjust its monitory policy following increased inflation at that time. This effort slowed the money supply growth thus checking on the unemployment levels. The other step by the federal government to check on unemployment rates was through the introduction of a fiscal policy that was intended to stabilize the economy (Beardon, 18). The policy achieved this through cutting down on taxes as well as increasing spending. The policy also impacted the interest rates and the
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One of these important functions includes the regulation of money supply in the country. This is dealt by the monetary policy of that particular country that has its limitations and demand serious attention from not only the policy makers but also the public who would have to follow these policies.
Financial markets are further divided into money markets and capital markets. Money markets deal in securities with a maturity date within one year. Capital markets mature in longer time frames. Bonds are debts with a maturity date, the investor loaned the business money. A stock has no maturity date; the investor owns a portion of the business.
This can be better observed with reference to the statistical data represented below: Interest Rates Fig.1: US Interest Rates 2007-2012 (US Department of the Treasury, 2012) It can be observed from the above diagram representing the interest rates fluctuations in the United States that since 2007 the economy has been witnessing steep decline in its financial investment market.
This implies that it is that rate which is charged by financial institutions in Australia’s banking sector to other banks for overnight loans. This official cash rate is an important monetary policy instrument that influences other interest rates within the market.
This starts from the macro and the micro levels of the economy (Stationery Office, 2006 p. 34). The economic stability of a country/state depends on the effectiveness of economic policies advanced in order to regulate the fiscal activities within the country and at the international levels.
In this way the fiscal policy is directly responsible for the level of prices and nationwide employment.
The government manipulates fiscal expenditures and tax rates to stabilize the economy. When there is a lull in economic activity in the nation government will respond by increasing funding of unemployment benefits and tax cuts will automatically follow.
Without a sound monetary policy, our economy would spin out of control. The policies that are conducted by the Federal Reserve Board (The Fed) are the are some of the most influential factors that affects our economic livelihood.
Monetary policy attempts to influence demand for products by increasing and decreasing short term interest rates charged to banks for Federal Funds.
To implement a monetary policy, a Central bank takes certain steps to influence the supply of money in the economy mainly through varying the interest rates. These steps go a long way to keep the rate of inflation at a controlled rate and curtail the supply of money in the economy.
For the past few years, several controversies are spreading regarding whether monetary policies should either be considered as rules or as discretion. The many economists debate between rule and discretionary monetary policies has given different
The average inflation rates in America were 3.24% and 2.85% respectively in 2006 and 2007. The average inflation rate in 2011 was 3.16 %. These statistics reveal that inflation rates remained almost stationary during last five years period. The interest rates were around 4% in 2006 and 2007 whereas it started to dip heavily after 2008.
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