Federal Reserve policy and foreign trade dynamics

Federal Reserve

What does the Federal Reserve take into account when establishing general and specific rates of interest? Describe the recent tools the Federal Reserve has used to influence the U.S. economy, and explain their effects. In your opinion, have these measures been effective or ineffective in addressing the major concern or concerns of the business cycle?

The Federal Reserve is taking into consideration the state of the economy, the unemployment rate, inflation and capital spending. The combination of these factors is used to determine if the economy is overheating or suffering from tremendous amounts of weakness. The key is for them is to create a balance between maintaining responsible levels of growth and preventing situations that could hurt it over the long-term (i.e. stagflation and asset bubbles). ("Feds Keep Stimulus in Place," 2013)

Recently, the Federal Reserve has been purchasing U.S. treasuries and mortgage backed securities. This is designed to stabilize these markets and spur demand for these kinds of assets. Moreover, they have reduced and kept interest rates near zero. This is in response to the stagnant rates of growth. These effects are helping to increase confidence and show that the Fed is willing to do what is necessary to maintain stability. ("Feds Keep Stimulus in Place," 2013)

These measures have been effective in encouraging economic growth. This is because these actions have increased confidence and prevented the economy from falling into a depression. However, the last several quarters are revealing that a period of stagnation is occurring with unemployment continuing to remain high. While the real estate market, is slowly recovering. As a result, they were forced to use other tools that will continue to promote these objectives such as: the buying of additional Treasury and mortgage backed securities. ("Feds Keep Stimulus in Place," 2013)

Evidence of this can be with comments from the Federal Reserve which said, "Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors." This is illustrating how the Fed believes that additional measures are necessary in order to ensure that the economy can receive added amounts of stimulus. In the future, this will provide balance and allow it to overcome the challenges it has been facing in the last several quarters. ("Feds Keep Stimulus in Place," 2013)

Select a country or trading bloc with which the United States has a current or pending free trade agreement. What are areas of comparative advantage of the United States and its trading partner? What are the benefits and disadvantages specific to this free trade agreement?

The country that was selected which has a trading agreement with the United States is Mexico. The biggest advantages that this is providing to everyone are: increased exports. According to the Office of the U.S. Trade Representative, this is resulting in a sharp rise in sales for the following products including: vehicle parts ($56.7 billion), machinery ($63.3 billion), electrical machinery ($56.2 billion) mineral fuel / oil ($26.7 billion), plastics ($22.6 billion), grains ($2.2 million), red meats ($2.7 billion), fruits ($1.9 billion), vegetables ($1.8 billion) and private commercial services ($63.8 billion). These areas are offering competitive advantages for both countries. This is because they are reducing the costs that consumers have to pay for a host of products and services. ("North American Free Trade Agreement," 2013)

The benefits are that wholesale and retail prices are more stable from this kind of agreement. This helps to create economic growth by reducing inflation and allowing consumers to spend more money in other areas. At the same time, this is increasing the standard of living in countries such as Mexico. This is because many different firms will establish operations inside these locations from the low costs of labor. Over the course of time, this will help Mexico to expand the middle class and improve its standard of living. ("North American Free Trade Agreement," 2013)