American economy overview and structure

American Economy

As an economic advisor to the Federal Reserve, I would strongly recommend, as an instrument of monetary policy, an increase in money supply, as well as a decrease in the benchmark interest rate. There are several reasons for this. The economy is in recession, which basically means that consumption has dropped (which shows in the inflation figures dropping as well, because of decreasing demand), unemployment has risen to 5.6%, as a direct consequence of the decreasing number of new businesses being created and of the reducing number of new jobs, while overall GDP growth has also decreased.

By increasing money supply and/or decreasing interest rate, the Federal Reserve would make money cheap, because individuals and businesses would need to pay less interest rate for borrowed money. The first result of this would be that more businesses would find it cheaper to borrow money and develop further there businesses or start new ones. This way, new are created, unemployment drops, while at the same time, consumption will gradually increase, with more individuals moving from the unemployed to the employed, earning and spending money.

The second result would be that people and companies will have less of an incentive to save money, because the return they would get for this is decreasing, due to the decreasing interest rate. People would be more interested to spend or to invest in the economy, which would boost consumption.

On the other hand, as an economic advisor, I would recommend the U.S. Congress to increase governmental spending and to decrease taxes, as the main instruments of fiscal policy that can be used. The reasons for this are several. First of all, by increasing governmental spending, the Congress would help boost the economy especially by targeting unemployment and providing, with the new projects on which the government would spend, new working places for individuals. This would in turn pick up consumption and, eventually, bring the country out of recession.

Further more, by decreasing taxes, the U.S. Congress would target both individual households and businesses. In terms of individual households, with lower taxes, people will be more likely to spend, because they would dispose of a greater income. This would increase aggregate demand and bring up consumption, which would in turn stimulate the economy out of recession. The businesses would find more income at their disposal to invest in the development of their businesses and would stimulate them to target new projects as well.

Both measures of fiscal policy would thus have as final goal the increase of aggregate demand, which would in turn increase GDP growth and take the country out of the recession.