US Economic Situation - Essay Example

US economic situation: Assessment of objectives and evaluation of policies Table of Contents Table of Contents 2 Introduction 3 (a) Macroeconomic objectives 3 Changes witnessed in US economy 4 Low unemployment 5 Figure 1: Unemployment rate in US 5 High economic growth 6 Figure 2: GDP growth rate in US 6 Low inflation 7 Figure 3: Inflation rate in US 8 (b) Macroeconomic policies of US government 9 Monetary Policy Evaluation 9 Fiscal Policy Evaluation 10 Conclusion 10 Reference list 12 Annotated Bibliography 14 Introduction Macroeconomics is that branch of economics which deals with the issues, objectives and the policies undertaken by the government that affect the country as a whole. Here in the paper the author is mostly concerned about the macroeconomic objectives of the American economy and whether these have been fulfilled in the last two years or not. Here, the author has summarized the major macroeconomic objectives of the US economy. He has evaluated the policies undertaken by the US government and the Federal Reserve to assess the success or failure of the economy in current political, demographical as well as economic perspective (Baker, 2015). (a) Macroeconomic objectives The major macro economic variables which help to assess the current economic situation of the country examining the achievements and failures in the last two years are employment, price, growth and balance of payments. The objectives which are targeted to be achieved in the last two years are Low unemployment High Economic Growth Low inflation The high economic growth indicates the gradual increase in the standard of living whereas Unemployment deals with the amount of surplus labour force that are willing to work but unable to join the work force of the country for low demand. Inflation highlights the increase in the general price level which causes decreasing purchasing power of the common people of the country. Here the author is mainly interested to discuss whether the American government is successful to achieve these macroeconomic goals in the last two years (Basistha, and Kurov, 2015). Changes witnessed in US economy As the stock market is generally high in US stock exchange, it indicates that the economic condition of the country is good enough to attract new investors across the world. It has been found that the industrial sector of the country has been booming again after the shock of recession witnessed in the 2007-2008. However, the problem lies in somewhere else. As the country is technically upgraded enough, the production technique they use in the industrial sector is mostly capital intensive. This leads to unemployment as the labour input is not extensively used in the production system. Nevertheless, the population of the country is not as high as the developing countries. Hence the unemployment rate is not so severe in this country. It has been found that the rate of unemployment in this country has remained at the level of 5.8 per cent for the last two years. The country has witnessed economic growth of near about 5 per cent in the last quarter of this year (Belgacem, et. al., 2015). US economy is globally considered as a developed economy. However this paper will examine the amount of stress the country has witnessed in the path of development for the last two years. Globalisation has caused the integration of this economy with various developing as well as under developed and many other developed countries. The appreciation of the exchange rate causes low inflation and it influences the international trade in a greater extent (Belgacem, et. al., 2015). The United States achieves the score 76.2 in case of economic freedom (Benes, et. al., 2015). The freedom in business has fallen compared to the last year. However, control over the government spending has achieved modest gains compared to the recent past. Low unemployment It has been found by the US officials that the unemployment rate of the country has fallen to 5.5 per cent in the last quarter (Williamson, S., 2015). Hence they claim that US has almost reached the full employment level. Here it should be noted that the full employment does not refer to the situation where every eligible person seeking job gets employed. However, with respect to the population of the whole country, the occurrence of unemployment is found to be very stumpy in US. There are various kinds of unemployment. Full employment level situation refers to such a condition where involuntary unemployment is quite negligible, like in US economy. This signifies that, the unemployed individuals prevailing in the economy are mostly voluntary (Williamson, S., 2015). Figure 1: Unemployment rate in US (Source: Benes, et. al., 2015) The above diagram reflects the declining rate of unemployment in the country over the years. It has been observed that during the recession period, the rate of unemployment was lying between 8 to 10 percent. However, from June 2012 onwards, it has been falling. In this current year (2015) it has been sharply decreased to 5.5 per cent (Benes, et. al., 2015). It has also been found that the claim for unemployment allowances has fallen rapidly in the last two years which indicates that the American government along with Federal Reserve have been successful to eradicate the unemployment problem from the country (Williamson, S., 2015). High economic growth Another important macroeconomic objective of the company is to increase its production of goods and services in the economy. Economic growth refers to growth of final goods and services produced in the country which is measured in terms of the real GDP. The GDP growth rate of an economy indicates potential gain of the economy over the years. Desirable economic growth of the country indicates that the income of the people of the country has been increasing with the increase in the production of output (Williamson, S., 2015). Figure 2: GDP growth rate in US (Source: Bernoth, Hughes Hallett and Lewis, 2015) In case of US it has been found that in the last two years the country has witnessed a certain amount of fluctuation in the GDP growth rate as shown in the above diagram. The diagram depicts the situation from July 2012 to July 2015. The diagram clearly depicts that in 2012 and 2013 the economic growth of the country was too low. However after July 2013 it has started to increase. In the last quarter of 2013 the US economy has achieved 3.8 per cent growth in GDP. Nevertheless, in the first quarter of 2014 it has suddenly fallen at the negative level (-0.9 per cent). It may be interpreted as the aftershock effect of recession. In the next quarter that is in July 2014 the country has experienced the highest growth in the last two years (4.6%). However, from July 2014 onwards, the economic growth of the country has been observed to be either stagnant or falling. It has reached 0.6 per cent in the first quarter of 2015. However, in the second quarter the growth rate has been increased again at the level of 3.9 per cent (Georgiadis, G., 2015). Hence, it can be said that the economic growth of the country is not highly affected with the diminishing unemployment rate of the economy. The economic interpretation behind this is that the US economy is considered as a developed economy globally which has already come across the Rostow’s ‘take-off’ stage. Hence the growth witnessed in this economy will obviously be mild. However, the frequent fluctuation indicates the policy undertaken by the US government needs to be reviewed again. Low inflation The rate of inflation indicates the stability in the price level of the country. Changes in the price level affect the purchasing power of the consumers. Hence, the consumer price index is widely used as an instrument for measuring the rate of inflation. Keeping the inflation rate low and stable is a very important macroeconomic objective which assures minimisation in the volatility of prices. The price volatility severely harms the business environment as the investors are unwilling to invest in an unstable economy (Imam, 2015). High inflation rate is harmful for the common people of the country as their purchasing power diminishes for this reason. However it is beneficial for the US government as the revenue earnings is increased. Hence the Federal Reserve has tried to balance both the desires. Federal Reserve has been successful to convince people that a mild inflation is not bad for the economy. Figure 3: Inflation rate in US (Source: Cúrdia, et. al., 2015) It is shown in the above diagram that the rate of inflation persisted in this country is between 1 to 2 per cent for the last two years. However, from June 2013 to June 2014, the rate of inflation has fluctuated around 2 per cent. After June 2014, the country has witnessed a sharp fall in the rate of inflation up to December. Then it has increased again and reached the level of 1.6 percent in June 2015. Hence it can be said that a mild rate of inflation persists in this economy for the last two years and it does not frequently fluctuate except the second-half of 2014. Therefore, it can be concluded that the Federal Reserve has been able to achieve the goal of low inflation rate which has improvised the current economic situation of the people of the country (Georgiadis, G., 2015). (b) Macroeconomic policies of US government The role of government in the development of US economy is unquestionable. USA is one of the most powerful nations across the world. However, the position it has attained is nothing but the result of undertaking proper macroeconomic policies by the Federal Reserve and US government. Apart from the liberalised economic situation, witnessed in the phase of globalisation, the US government regulation has also enhanced the economic development of the country. They manage the overall economic activities of the country targeting the above objectives. However to achieve those objectives the government needs to implement some macroeconomic policies. The policies can be categorized in two ways. One is fiscal policy through which the government of US determines the tax level and spending. Another is the monetary policy through which the Federal Reserve balances between the supply and demand of money (Hubrich and Tetlow, 2015). Monetary Policy Evaluation The Federal Reserve tries to influence the interest rate to affect the spending most specifically to attract more business investment in this country. The change in the interest rate has also affected the spending on consumer durables and investment in residential purpose. In US economy the monetary policy undertaken by the Federal Reserve has stimulated the slow aggregate spending in the short run. However, in the long run, the policy has affected the rate of inflation thereby influencing the volatility in the price level. The policy implemented by Federal Reserve has ensured the people of the country a low but stable inflation rate thereby promoting transparency in the price level (Leyden and Link, 2015). Fiscal Policy Evaluation The fiscal policies undertaken by the US government influence the economy in several ways. One of the major policies is the change in the government purchases. Discretionary government spending has influenced the aggregate demand of the country severely. The real GDP of the country has been increased partially through multiplier effect (McCauley, et. al., 2015). The business tax credit lowers the tax liability of the country thereby attracting more investment in the industrial sector of the country. The government budget policies in the last two years has caused deficit but it has stimulated private investment. As a result the GDP of the country is increased (Moessner, 2015). In the last two years the country has witnessed a large amount of current account deficit. However the policy makers assures that it will not hamper the competitiveness in the US market economy as on the other side the country has been experiencing a capital account surplus. This indicates that the country is an attractive destination for business investment. The country borrows for consumption purpose, and not for future productivity. This future productivity is ensured by the inward investment of the country (Sá and Wieladek, 2015). Conclusion The macroeconomic objectives of the US policy makers basically aim to achieve higher economic growth along with lower unemployment rate and inflation. This can only be assured by proper economic policy undertaken by the US government and the Federal Reserve. The paper has examined the macroeconomic objectives of the economic policy makers of US and assessed them in the current context. The author has also evaluated the policies which have been implemented to achieve the goals. From the study it can be concluded that the US regulatory body has been successful to implement the policies to achieve the low inflation rate along with lower rate of unemployment. However the growth of the economy has been sluggish for the last two years. Reference list Baker, A., 2015. Varieties of economic crisis, varieties of ideational change: how and why financial regulation and macroeconomic policy differ. New Political Economy, 20(3), pp. 342-366. Basistha, A. and Kurov, A., 2015. The impact of monetary policy surprises on energy prices. Journal of Futures Markets, 35(1), pp. 87-103. Belgacem, A., Creti, A., Guesmi, K. and Lahiani, A., 2015. Volatility spillovers and macroeconomic announcements: evidence from crude oil markets. Applied Economics, 47(28), pp. 2974-2984. Benes, J., Berg, A., Portillo, R. A. and Vavra, D., 2015. Modeling sterilized interventions and balance sheet effects of monetary policy in a New-Keynesian framework. Open Economies Review, 26(1), pp. 81-108. Bernoth, K., Hughes Hallett, A. and Lewis, J., 2015. The Cyclicality Of Automatic And Discretionary Fiscal Policy: What Can Real-Time Data Tell Us?.Macroeconomic Dynamics, 19(01), pp. 221-243. Cúrdia, V., Ferrero, A., Ng, G. C. and Tambalotti, A., 2015. Has US monetary policy tracked the efficient interest rate?. Journal of Monetary Economics, 70, pp. 72-83. Georgiadis, G., 2015. Determinants of global spillovers from US monetary policy. Journal of International Money and Finance. 5, pp. 103-147. Hubrich, K. and Tetlow, R. J., 2015. Financial stress and economic dynamics: The transmission of crises. Journal of Monetary Economics, 70, pp. 100-115. Imam, P. A., 2015. Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness. International Journal of Finance & Economics, 20(2), pp. 138-154. Leyden, D. P. and Link, A. N., 2015. Public sector entrepreneurship: us technology and innovation policy. UK: Oxford University Press. McCauley, R. N., McGuire, P. and Sushko, V., 2015. Global dollar credit: links to US monetary policy and leverage. Economic Policy, 30(82), pp. 187-229. Moessner, R., 2015. Reactions of real yields and inflation expectations to forward guidance in the United States. Applied Economics, 47(26), pp. 2671-2682. Sá, F. and Wieladek, T., 2015. Capital Inflows and the US Housing Boom.Journal of Money, Credit and Banking, 47(S1), pp. 221-256. Williamson, S., 2015. Monetary policy normalization in the United States.Federal Reserve Bank of St. Louis Review, 97(2), pp. 87-108. Annotated Bibliography Slini, T., Giama, E. and Papadopoulos, A. M., 2015. The impact of economic recession on domestic energy consumption. International Journal of Sustainable Energy, 34(3-4), pp. 259-270. Here in this paper, the authors have depicted that how the people of the country have changed their consumption habit. The recession had lessened the purchasing power of the people. Hence, they were compelled to change their habits. This has influenced the policy makers to make invest in the sustainable energy production making it usable in the industrial sector thereby enhancing the future productivity. Reifschneider, D., Wascher, W. and Wilcox, D., 2015. Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. IMF Economic Review, 63(1), pp. 71-109. This paper has depicted that how the aggregate supply of the US economy will be affected by the recent monetary policy undertaken by the Federal Reserve. It states that the people of the country will be affected severely as the change in the interest rate will affect the investor’s decision thereby influencing the employment generated in the country. Aydin, G., 2015. The Modeling and Projection of Primary Energy Consumption by the Sources. Energy Sources, Part B: Economics, Planning, and Policy, 10(1), pp. 67-74. The energy consumption mainly includes the electricity which becomes very costly during that period. However, the capital intensive production technique caused massive increase in the demand for energy consumption. Here in this paper, the authors have depicted how the primary energy consumption can be remodelled so that it can be sustained for the future generations too. Ferrero, A., 2015. House price booms, current account deficits, and low interest rates. Journal of Money, Credit and Banking, 47(S1), pp. 261-293. In this paper the author have showed that how the policy changes affect the macroeconomic objectives of the country. Huge current account deficit shows that the country borrows for the consumption purpose. The house price has been increased due to high demand because of low interest rate. The study shows that the houses are now considered as valuable assets than putting the same amount of money in bank. Jung, P. and Kuester, K., 2015. Optimal labour- market policy in recessions. American Economic Journal: Macroeconomics, 7(2), pp. 124-156. In this paper the authors have showed that how the labour market policy has influenced the market economy there by the cost of the labour input during the period of recession. The change in the labour demand has been accompanied by low capital investment which has caused new policy implementation to overcome the situation during that period. Read More