Home > Free Essays > Economics > Financial Reporting > The Fiscal and Monetary Policy and Economic Fluctuations
Cite this

The Fiscal and Monetary Policy and Economic Fluctuations Term Paper


The American economy has undergone dynamic changes over the last five years. Clearly, the economic recession experienced between 2008 and 2010 is one of the most important effects on the economy.

Besides the impact of the economic recession, the efforts of the American government to deal with the problem have produced significant changes.

Due to these aspects, the economy shows significant differences between 2008 and 2013. Aspects of unemployment, inflation and interest rates, along with the national GDP, provide an important technique for analyzing the economic trend (Orhangazi, 2013).

In 2008, the US economy was experiencing a rapidly growing rate of inflation. By December that year, the inflation rate was approximately 3.9%, but the annual average was around 3.6%. It was clear that the economy would tumble by a significant margin.

Throughout 2009, the inflation rate reduced significantly, ending the year with an average rate of -0.2%. However, in 2010, the inflation rate increased significantly. By December that year, the inflation rate had reached 1.2%. Moreover, the trend continued throughout 2011 as the economy was experiencing a recovery from the crisis.

It recorded the highest inflation rate in the decade, which reached 1.6% in September 2011. Nevertheless, there was a rapid increase in the rate of inflation in 2012, reaching an average of 3.1% but started declining before the end of the year (Orhangazi, 2013). The rate reduced significantly throughout 2013, ending the year with an average rate of 1.3%.

The impact of the economic recession is clearly observed when the unemployment rate of the US is analyzed. In addition, comparing the rate of unemployment in 2008 and 2013 provides an indication that the country has achieved positive results from the strategies implemented to curb the recession.

For instance, by the end of 2008, the average unemployment rate stood at of 10.1%, but reduced to around 7.3% in 2013. In addition, the first few months of 2014 provide indication that the rate is reducing. Economic analysts have shown that the rate now stands at 6.6%.

Since the onset of the recession in 2008, the Federal Reserve Bank (Fed) started various initiatives to cope with the problem (Orhangazi, 2013). One of the most important initiatives that Fed took was to keep and maintain low interest rates.

For instance, Fed has maintained the interest rate at average percentages of almost zero. Fluctuations have been minimal. In fact, Fed had a 6-year plan of sustaining low interest rates, which will end in 2014.

The rate of unemployment refers to the number of persons looking for employment as a percentage of the total labor force. If this ratio is high, the rate of unemployment is high, implying that the economy is unable to provide citizens with job opportunities.

Thus, it is reflects the performance of a country’s economic growth and development. Between 2008 and 2011, America’s rate of unemployment increased rapidly due to the recession.

For instance, the economic recession and credit crunch led to the closure of a number of businesses, while others reduced their ability to hire new employees. Thus, the ratio of the number of people actively seeking employment to the total labor force increased significantly (O’Sullivan, Sheffrin & Perez, 2014).

The rates of inflation and unemployment have a natural relationship. A rise in inflation rate means that prices of products for sale are increasing. This makes it difficult for people to obtain basic products.

People tend to reduce their expenditure on luxuries, which implies that unemployment rate increases because companies are affected by this behavior. This was the situation in the US between 2008 and 2011, when the economic recession affected people’s purchasing power and increased the rate of unemployment.

Taxation is an important strategy used to encourage consumer spending as a way of improving economic performance. If taxes are adjusted such that individuals do not feel an intense impact of paying, it is possible to encourage consumer spending (Horton, 2012).

In this case, the government ought to reduce taxes and keep them on the lower end. In this way, consumers will not develop a negative attitude towards spending on luxuries (O’Sullivan, Sheffrin & Perez, 2014). In addition, more and more people will spend rather than save, which means that the economy will be vibrant.

In addition, sentiments provide an important tool for encouraging consumer spending. In this case, the government presents a good picture of the economy and its future. People are assured that their jobs will be stable, investments will yield income and the economy will continue to grow. Thus, they are convinced to spend on basic, luxury and investment projects.

Taxation has positive and negative impacts on the national economy. For instance, reducing taxes or keeping them minimal in order to encourage consumer spending is likely to encourage investments into various projects, which means that more companies will emerge.

In turn, this creates job opportunities and reduces the rate of unemployment. However, low taxation is likely to encourage high interest rates because the government will be looking for avenues to compensate the money it loses by reduction in taxes. Nevertheless, low taxes are likely to discourage inflation because consumer purchasing power is enhanced (Horton, 2012).

Sentiments are likely to encourage consumer spending. As the rate of consumer spending increases, the economy expands, creating opportunities for jobs and reducing the rate of unemployment. In addition, sentiments are likely to discourage inflation because the government wants to present a good picture of the economy and its future.

However, as the rate of consumption increases, interest rate is likely to increase because the pool of consumers is large. On the other hand, the rate of inflation decreases because the rate of unemployment is also decreasing.

References

Horton, M. (2012). Fiscal Policy: Giving and Taking Away. New York: Finance & Development. International Monetary Fund.

O’Sullivan, A., Sheffrin, S., & Perez, S. (2014). Survey of economics: Principles, applications and tools. Upper Saddle River, NJ: Pearson-Prentice Hall.

Orhangazi, O. (2013). Financialization and the US Economy. New York: Edward Elgar Publishing

This term paper on The Fiscal and Monetary Policy and Economic Fluctuations was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.

Need a custom Term Paper sample written from scratch by
professional specifically for you?

Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar

301 certified writers online

GET WRITING HELP
Cite This paper

Select a website referencing style:

Reference

IvyPanda. (2019, April 24). The Fiscal and Monetary Policy and Economic Fluctuations. Retrieved from https://ivypanda.com/essays/the-fiscal-and-monetary-policy-and-economic-fluctuations-term-paper/

Work Cited

"The Fiscal and Monetary Policy and Economic Fluctuations." IvyPanda, 24 Apr. 2019, ivypanda.com/essays/the-fiscal-and-monetary-policy-and-economic-fluctuations-term-paper/.

1. IvyPanda. "The Fiscal and Monetary Policy and Economic Fluctuations." April 24, 2019. https://ivypanda.com/essays/the-fiscal-and-monetary-policy-and-economic-fluctuations-term-paper/.


Bibliography


IvyPanda. "The Fiscal and Monetary Policy and Economic Fluctuations." April 24, 2019. https://ivypanda.com/essays/the-fiscal-and-monetary-policy-and-economic-fluctuations-term-paper/.

References

IvyPanda. 2019. "The Fiscal and Monetary Policy and Economic Fluctuations." April 24, 2019. https://ivypanda.com/essays/the-fiscal-and-monetary-policy-and-economic-fluctuations-term-paper/.

References

IvyPanda. (2019) 'The Fiscal and Monetary Policy and Economic Fluctuations'. 24 April.

Related papers