Macroeconomics - Research Paper Example

Demand for goods and services are related to the real interest rate which is nominal interest rate minus expected inflation, whereas nominal interest rate is the market rate quoted in the financial pages of the newspaper. In this case, interest rate is almost zero that means nominal interest should be equal to expected inflation and the expected inflation is about 2% per year which is justifiable, it indicates that nominal interest rate showing unacceptable growth, adequate amount of rise in the nominal interest rate can increase the real interest rate to a desirable level.

Usually when interest rate falls, borrowing increasing and individual’s purchasing power increases and so does the demand for goods and services, but if unemployment is very high and an economy is facing low GDP growth per year than shows the imbalance in the economy. According to the Philips curve, wages increases rapidly when unemployment is low and wages increases slowly when unemployment is low therefore the government and the firms should raise wage rate to attract scarce workforce to increase the national production which will eventually increase the demands for produced goods and services.

According to Okun’s law, a percentage increase in unemployment causes a 2% fall in real GDP, whereas in this case unemployment is very high, which is one the major reason of GDP downfall (Hall, 2011). Currently inflation is not matching the level of employment and GDP rate, therefore Fed and the government should increase the wage rate and decrease income tax rate to an acceptable level to encourage the spending which might result in increased demands for good and services and will eventually increase the national production, the government should also increase the subsidize the national production and increase import duty so national products will be preferred over international products (Hall, 2011).

Conclusion By increasing nominal interest rate with a justifiable amount, by leveraging wage rates and the local production, and by increasing import duty; the Fed and the government will be able to stabilize the economy and the balance of payment, the economy will grow at justifiable rate, the unemployment will decrease and the national production will increase while maintaining the inflation rate of about 2% which is quite justifiable. Part 2: Introduction Amendments in legislation and regulations were not the only causes of 2008 financial crises, changes in monetary and fiscal policy also contributed to the crises.

The Federal Reserve dropped its federal funds rate very quickly to a very low rate, and kept the rate at historic lows for an extended period of time. Secondly the US deficit has increased its borrowing from foreign sources, especially from emerging countries such as China which are enjoying economic surplus. Contribution of monitory and fiscal policy in the causes of financial crises To eliminate the effect of the collapse of the technology equity bubble and the terrorist attack on Twin Tower on September 11, 2001 on the economy; Fed chairman Greenspan injected low-interest rates below held guidelines which was an attempt to instill huge amount of liquidity in the US monetary system which actually resulted in lowering the interest rate by 2003 to 1%, the decided interest rate by Fed breaks the record of fifty years, that