Economic Issues in the U.S. Essay

Exclusively available on IvyPanda Available only on IvyPanda

Introduction

This essay seeks to relay a detailed discussion on various economic issues. The selected issues to be discussed include economic conditions and policies in the U.S. during the 1960s that led to a long period of stagflation a long with Keynesian diagnosis provided and the contrast between the new classical idea and that of Keynes. There is a discussion of interest-parity, effects of a country’s monetary expansion on its interest rates, exchange rates, and output both in permanent and temporary situations. Lastly, there is a discussion on the current condition of the U.S. economy, that is, the high unemployment rate and zero-rate income growth and the policies introduced to deal with the situations.

We will write a custom essay on your topic a custom Essay on Economic Issues in the U.S.
808 writers online

Discuss the motives, nature, and purpose of the original GATT (General Agreement on ‘Tariffs and Trade), and the extent to which this purpose was achieved in the first six Rounds of negotiations (through the mid-’60s)

Stagflation is an economic condition characterized by high commodity price (inflation), high levels of unemployment and zero growth rates. Therefore, the word stagflation is a combination of inflation and stagnant economic growth in an economy. The following government activities can cause stagflation: high government spending alongside increased business tax, high business regulation alongside increased business taxation, increased regulation of businesses alongside low business taxations, high government expenditure alongside reduced business regulation, and less business regulation alongside reduced individual income taxes. The year 1960 was marked with elements of unemployment rates. The economy, though, had a lot of capital and equipment for production. The available equipment guaranteed quick response to the rising demand for products. In an attempt to improve the economic conditions, President Kennedy’s government, through the treasury, implemented a fiscal policy that sought to reduce tax on businesses. Remember that this is the same period that the country was fighting the Vietnam War.

The step to cut business tax rates were favorable to businesses but unfavorable for the government. To expound on the theory, tax is one of the reliable sources of government revenues. Therefore, tax reduction implies the same as revenue collection. Less revenue limits a government’s ability to spend on national development activities such as the building of roads, highways, and Facilities like hospitals. Government spending has a strong influence on employment creation thus; its absence shows signs of a potential unemployment rate. At the same time, the government through the Federal Reserve implemented a contractionary monetary policy that sought to reduce the money supply in the U.S. economy. Interest rates increased, which led to an increase in the cost of funds. The step reduced the amount of money lent to individual borrowers. The situation created an economy that exhibits fewer investment activities. Production levels were suppressed by the situation. The level of supply of basic commodities reduced as demand rose. The situation led to the escalation of commodity prices (inflation).

The two conditions created, that is, a stagnant economy (because of high unemployment rates) and high commodity prices (because of high demand compared to less supply) resulted in stagflation. Keynesian diagnosis of the situation was that the economy was undergoing a period of inflation. Keynes argued that if profitability levels surpass the cost of capital, short-term period expansion of production would be unattainable. Keynes suggested an increase in the long-term cost of capital (federal funds rates and overnight lending rates) as a solution. On the contrary, the new classical opinion on the policy (an increase of interest rates) is that the cost of borrowing funds would increase. This would, in turn, reduce the demand for funds in a short-term period. The result is fewer production levels hence high inflation.

Discuss the issues that drove President Reagan to propose the 8° (“Uruguay”) Round in the mid 80, and the issues that caused this Round to fail, or nearly so. How did this near- failure lead to the failed 9″ GATT Round (I* “WTO” Round)

Interest rate parity is the difference between the interest rate and cost of capital between two different countries. The parity condition states that the interest rates or returns on similar assets held in different countries should be equal after they have been expressed in the same currency. For example, suppose the local currency is in dollars, a foreign currency is in the pound, and an investor decides to hold a one-year investment in dollars and another in pounds. At the end of the investment period, the investor will receive interest in two different currencies, that is, in dollars and pounds. The interest rate parity requires that the interests from the investments should be of the same amount after conversion into either dollars or pounds. Monetary expansion policies have the effect of increasing the money supply in an economy. An increase in money circulation in an economy will reduce the demand for borrowed funds. The lending institutions will, therefore, be forced to lower the lending rates in order to attract borrowers. Take for example, that the interest rate in the US currently is 14%, and then it is lowered to 11%. Other factors held constant, there would be interest parity between the US and Britain. Therefore, the interest rate parity condition would be violated. In the short-term, that is what would happen but in the long-term (under permanent monetary expansion), since borrowing in the US is cheaper comparatively, more local and foreign borrowers will be attracted.

There will be an increased demand for US $ in the currency market and thus increases dollar value against the pound. Increased value of dollars will set a parity condition back to normal. An increase in money circulation will increase consumption rates in the U.S. The rates of imports will be high enough to meet the high demand for goods and services. In the short-term, the value of U.S. currency in the exchange market will be constant. Since exchange rates determine parity conditions, the conditions will prevail. In the long-term, the value of U.S. $ in the exchange market will drop because more U.S. $ will be supplied in the foreign exchange market than is needed. What will follow afterward is an arbitrage situation due to violation of parity condition.

An increase in the amount of money circulating in an economy has the effect of stimulating production. This is true because individuals will be stimulated to make willful investments in various economic sectors. An increase in investment will increase the levels of output per period. High levels of investments can only be supported by high employment levels of factors of production. In the short-term, an increase in output will have no effect on the parity condition. However, in the long-term, domestic production will be more than is required for local consumption. The excess products will be exported. Suppose the U.S. is the exporting country, there will be high demand for U.S. currency in the foreign exchange market. The situation will increase the value of U.S. $ against other foreign currencies. Given that the interest parity condition is influenced by activities in the exchange rate market, interest rate parity conditions will not hold.

1 hour!
The minimum time our certified writers need to deliver a 100% original paper

In the current impasse in global trade discussions, there are clear incentives to violate the goal of “multilateralism” in favor of “preferential trade associations”. The most advanced of these is the European Union, which is having problems. Briefly review the history of this customs union and consider the proposition that it has “bitten off more than it can chew”. What do you consider to be its biggest mistake(s)?

The current U.S. economic condition can only be described as unstable. This instability is created by increased gas prices, reduction of interest rates, and implementation of sub prime mortgage. The high cost of gas prices has led to an increase in the cost of living. For instance, it is currently more expensive to commute to the workplace and back compared to the situation before. The increase in gas prices has negatively affected the social lifestyle of some individuals. For instance, it is currently more expensive to go on a long trip during vacations than the case before. For some American citizens, it is unaffordable. The step by Federal Reserve to lower the interest rates also contributed to the economic instability of the U.S. Low-interest rates attract many borrowing activities and increases the amount of money circulating in the economy. The situation increases spending on both local and foreign products. More import activities than export weaken the value of the dollar in the foreign exchange market. Unstable currency destabilizes an economy. The implementation of sub-prime mortgages by the Federal Reserve has weakened U.S. economic performance. The program seeks to incapacitate low-income earners to purchase houses of their interest through lending at low-interest rates. The program has led to a rapid increase in interest rates due to the increased demand for sub-prime mortgage facilities.

High unemployment rates in the U.S. have been created due to less government spending. Reduced government spending renders private sectors more active. The private sector can only employ a limited number of workers depending on their competency levels and other social factors. For this reason, a larger section of the U.S. population has been left out of the job market. The unemployment situation has led to the widening of the gap between the poor and the rich. Aggregately, the result is almost no income growth rates. In an attempt to increase liquidity in the financial market, the Federal Reserve introduced emergency credit facilities. The facilities were intended to fill the gaps between open market operations and the discount window. For instance, liquidity provisions to AIG and Bear Stearns. The following are the possible scenarios that could arise because of the policy: emergency credit facilities could increase the productivity levels of various institutions. An increase in local production could stimulate the export of surplus products. There could be an excess supply of products in the local market, which could lead to deflation.

Print
Need an custom research paper on Economic Issues in the U.S. written from scratch by a professional specifically for you?
808 writers online
Cite This paper
Select a referencing style:

Reference

IvyPanda. (2021, March 19). Economic Issues in the U.S. https://ivypanda.com/essays/economic-issues-in-the-us/

Work Cited

"Economic Issues in the U.S." IvyPanda, 19 Mar. 2021, ivypanda.com/essays/economic-issues-in-the-us/.

References

IvyPanda. (2021) 'Economic Issues in the U.S'. 19 March.

References

IvyPanda. 2021. "Economic Issues in the U.S." March 19, 2021. https://ivypanda.com/essays/economic-issues-in-the-us/.

1. IvyPanda. "Economic Issues in the U.S." March 19, 2021. https://ivypanda.com/essays/economic-issues-in-the-us/.


Bibliography


IvyPanda. "Economic Issues in the U.S." March 19, 2021. https://ivypanda.com/essays/economic-issues-in-the-us/.

Powered by CiteTotal, essay reference generator
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda. Request the removal
More related papers
Cite
Print
1 / 1