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Dropping the interest rates and doing other things to make consumers breathe a little easier when they make a purchase shows that the country is pulling together, which is something that the recession is teaching almost everyone in America - that people are all alike in many ways, and they need to help each other out as much as possible.
Is the fiscal policy maneuvering a good idea? Many people think that using fiscal policy is not a good idea to try to stimulate the economy. The reason for this is that fiscal policy has a built-in system of checks and balances. For example, when the unemployment rate rises, the amount paid out in unemployment benefits also rises. It is just the way the system works. Many think that people mess with that system at their own peril. The concern is that the whole thing will get out of balance because of something the treasury department or another government department has done about the interest rate or some other aspect of fiscal policy, such as the current bailout bill, and it will be more time-consuming for the government and costly for the American people to fix it.
What is lag time and why does it matter? When the fiscal policy is adjusted, there is often a period of time between when the changes are made and when the economy starts going back up. Since most recessions are short anyway, there is generally not much time difference in having the lag time or just waiting patiently for the recession to be over. With the current recession, however, this may not be the case. There are many serious problems in the country today, and this recession is the most severe recession that has been seen in many years. Many people are likening it to the great depression, especially if it continues to get worse - which most people believe it will. In the case of recession and economic problems today, lag time may still be preferable to simply waiting it out.
What started our current economic problems? The amount of easy credit that the central bank was giving out in the 1990s largely contributed to the problems with the economy today. The credit helped to sustain the rise of the stock market for a very long time. The problem was, the stock market was like a bubble, and when it finally burst, it made a real mess. If the central bank had not been so free with credit, the stock market would not have risen so high, but it would not have collapsed so hard, either. Another serious problem with the economy was the sub-prime housing market. Many, many people were allowed to buy homes that they really could not afford, and they bought them with 100% financing and interest rates that were very low but would rise later. They had variable-rate mortgages, balloon mortgages, and other ways of purchasing homes, such as loans where they paid the interest only. None of these were good, and they all contributed to so many people losing their homes today.
Does low inflation really give financial stability? Apparently not. It was thought that was the case, but after the problems with the stock market, it seems that low inflation rates really have little to do with any kind of financial stability. It is possible that low inflation may even make people feel overconfident about their financial future, much the way they did about the housing market. If this happens, they will likely spread themselves too thin and really be in trouble when the inflation rate starts to go up again and they find that they have no money. This has already taken place and is being seen right now in the current recession.
How can another economic recession be prevented? One of the best ways to prevent another recession is to make sure that the central bank does not give out credit easily, and that other banks do not, either. People should live within their means, and businesses and the government should do the same. The fluctuations in the economy from the easy credit and the partial collapse of the stock market and the housing market contributed to the recession, and the only way to stop it from happening again is to avoid the factors that caused it in the first place. This will also go a long way toward repairing the current problems and pulling the country out of the recession that it is in right now.
There will always be some amount of economic fluctuation, but the severity of the current cycle is not something that investors and others who deal with the stock market want to repeat. The same is true of those who work primarily in the housing market, because they have lost a lot of money as well. When the stock market or housing market is doing well, lenders often underestimate the risks to themselves. When the stock market or housing market does poorly, they overestimate the risks and see it as being more severe than it really is. Because of this, the economy cycles harder than it needs to, and it takes everyone along for the ride. This will never be completely removed from the economic growth and development of a country or a world, but it can be moderated.
Chapter II: Literature Review
Reviewing the literature is a very important part of any study. Without doing so, what has taken place in the past cannot fully be understood, and therefore what needs to be done now and in the future is often avoided and not well-grasped from a conceptual point-of-view. Looked at here will be some recessional issues from the past such as the impact that the Federal Reserve has on monetary policy, how the Asian Financial Crisis affected the United States, and what kinds of impacts recessions have on people from a social standpoint. How other cities and states have addressed recession and recovered from it is also important from the standpoint of helping Richmond, VA.
The Federal Reserve monetary policy is made by the Federal Open Market Committee. For much of 2003, the Federal Reserve was concerned about the economy because growth was very sluggish and uneven, although not as poor as it is now. However, during the last part of 2003 and the first part of 2004, improvements were seen as the economy began to grow at a more rapid rate. Early in 2003 the growth was sluggish for several reasons, but the most serious one was the threat of war with Iraq (Board, 2004). This slowed down growth not only in the United States but overseas as well.
When tax cuts became effective in the middle of the year and the inflation rate continued to decline, people became more optimistic in general and were willing to spend a little bit more of their money. In addition to that, businesses began to hire more workers again, although there was still a severe shortage of good-paying jobs in the country (Board, 2004). The state of the economy during that time indicated that it was beginning to recover from the terrorist attacks, the war in Iraq, and all of the other issues that caused so much difficulty for it (Board, 2004). However, it was still weak, and it was seen as likely that it would be quite some time before America returned to the booming economy that it once had. This became even more apparent recently when the housing market collapsed and the stock market began to fall.
Both inflation and recession are issues for the Federal Reserve, and it seems that the Reserve is worried about both of these things, although not equally. Inflation is a concern because of things such as rising gas prices (Board, 2004). They continued to be worrisome for many and they continued to rise despite protests, complaints, and suggestions as to how they could be lowered. Some states discussed removing a.10 a gallon gas tax for one month over the summer to encourage travel. However, gas prices had risen so high that.10 a gallon might not make a great deal of difference to many. The rising gas prices created inflation in other ways as well. Because it was more expensive to transport good across the country and to provide services that required fuel, such as lawn care, prices on almost everything went up (Board, 2004). The gas prices have since come down but the diesel prices are still up, and that means that the costs of everything else like food and clothing has stayed high, as well.
Inflation was still not too high, but the largest concern was that the country might go into a recession because many…[continue]
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