Economy Has Been Showing Slow, but Steady

economy has been showing slow, but steady improvement. I expect that it will continue on this pace for the next three quarters as a result of projects that have been made for the unemployment rates, GDP growth, and inflation. The rate of unemployment has steadily decreased with the rate being 8.2% for March 2012, which was a minor increase over February's rate of 8.3%. The rate in November had been 8.6%, so the rate has been slowly rising. March's report from the U.S. Bureau of Labor Statistics noted that 120,000 nonfarm jobs had been added to the manufacturing, restaurant, and health care industries, but the retail industry lost jobs. (Bureau of Labor Statistics, 2012). This in actuality went against economists' projections of 203,000 new jobs for March (Packowitz, 2012).

The GDP growth rate has been slow to improve, with hovering just below 3%. As in past recoveries from recessions, it is normally expected to be around 6%, but because of the unprecedented unemployment rate and a trade deficit of 3.5%, the GDP is taking longer than expected to recover (Thornberg & Shepard, 2012). The risk of the economy recovering too quickly could provoke an inflationary period, so a delicate balance must be maintained.

2. a.

Year 2000

Year 2010

Good

Qty

Price

Qty

Price

Auto

$50,000

$60,000

Bread

500,000

$10.00

400,000

$20.00

Nominal GDP

$10,000,000

$15,200,000

Real GDP

$10,000,000

$10,000,000

The implicit price deflator for GDP

Fixed-weight price index (CPI)

Auto

1.2

Bread

2

b. The cost of bread has doubled over the 10-year period while the cost of automobiles has only increased by 20%.

P0

Q0

P1

Q1

p0q0

p0q1

p1q0

p1q1

Auto

$50,000

$60,000

$5,000,000

$6,000,000

$6,000,000

$7,200,000

Bread

$10

500,000

$20

400,000

$5,000,000

$4,000,000

$10,000,000

$8,000,000

$10,000,000

$10,000,000

$16,000,000

$15,200,000

Lapeyres

Paasche

ii. The Laspeyres index defines the price of goods during a base period and uses those prices to analyze the change over time. The Paasche index gives a price for the goods today and compares them against historical prices.

iii. As the senator, I would choose the CPI because it represents the prices of goods purchased by consumers while the GDP deflator represents all goods and services. The CPI would be more representative of consumer spending, which would be important in adjusting the benefits to the cost of living.

3. The expansionary fiscal policy is used during a recession to stimulate the economy. This policy is based on the idea of John Maynard Keynes fiscal policy that was introduced during the Great Depression. He argued that the market and economy is incapable of self-regulation, therefore it was the responsibility of the government to inject money into the economy (Economic Policy). This could be done by increasing government purchases, decreasing taxes, or increasing transfer payments. Transfer payments are most commonly given as welfare payments to the poor, unemployment and Social Security payments to the disabled or elderly. These payments; however are not expected to produce increased economic activity.

a. A person who favors preserving the size of government would favor increasing government purchases. This action puts money directly into the economy by building up infrastructure such as building new bridges and road construction or extending unemployment. People now have money to spend, which continues to stimulate economic growth. The problem; however, with increased government purchases is that the end result is generally a budget deficit, which burdens the future generation of taxpayers.

b. A person who thinks the public sector is too large may opt for decreasing taxes, which will decrease the size of government. This method is often preferred over government purchases. The premise is that by reducing taxes, people will have more disposable income to use for purchases. This in turn should stimulate aggregate production and employment and will ultimately continue to increase income. It is easier to implement tax changes, so this method is preferable by voters and political leaders who would rather pay fewer taxes and keep the size of government down. Cutting taxes, however may lead to budget deficits, but if the economy begins to grow as a result, they are expected to be short-term, as revenues will increase. It is suggested that it is best to cut the taxes of low to middle-income citizens because they are more apt to spend the money received than those with higher income who will be more apt to save the money (Economics Help, 2008)

4. Monetary policy is implemented by the Federal Reserve (the Fed). The Federal Reserve Act of 1913 gave this responsibility to the Fed. There are three methods associated with this policy, open-market operations, discount rate, and reserve requirements. The Federal Open Market Committee (FOMC) oversees the open market while the Board of Governors is in charge of the discount rate and reserve requirements. The basic objective of monetary policy is to increase the amount of money available to stimulate spending. This is accomplishing through lowering the discount rate and increasing the amount of money that is available to be used in the economy, i.e. releasing more money from the Fed (Federal Reserve).

a. The expected cause-effect change through which monetary policy is made effective is that by lowering the discount rate, other rates will also follow suit. These rates include long-term and short-term interest rates and foreign exchange rates. The amount of money and credit increases and that leads to more spending, which then increases employment and output (Federal Reserve).

b. The major strengths of monetary policy are that by cutting rates, it is expected that a serious recession can be avoided, but most importantly, by lowering interest rates, investment is then encouraged because it costs less to borrow money. More people may opt to purchase homes and the cost of mortgage payments are reduced, thereby producing increased disposable income for which that can then be spent, which then again, leads to increased employment and output.

5. "The Federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight" (Federal Reserve). The Prime rate as defined by the Wall Street Journal is "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." So in actually, the Prime rate is calculated by using the Federal funds rate also known as the cost of borrowing money between banks.