Economic Advisment Paper
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Economic Advisement Paper
The current state of our economy in the United Stated is one that has seen many dark moments yet is slowly persevering. These are times when unemployment has an effect on Aggregate Demand and Supply Models causing there to be less capital investments while also contributing to higher interest rates. However, the federal government is also working hard to fight the down pull of the economy and, as a result, we are improving from where we were a few short years ago.
Interest Rates
Current interest rates in the United States are a reflection of a deep recession that began in 2007. There are many interest rates in the economy and the only one that can be directly controlled by the Fed is the short-term interest rate.
In order to respond to the financial crisis of 2007 the Federal Reserve reduced the level of short-term interest rates to near zero and also purchased large quantities of longer-term treasury securities. These actions support the idea that long-term interest rates will help households and businesses finance new spending and help support purchases of other assets including property and stocks.
In 2012, the average interest rate for treasury bills was 0.127 percent and when including all marketable interest bearing debt, the interest rate was 2.043 percent. According to Conley (2012), “Short-term interest rates will remain in microscopic territory through 2013” (para.1). The Federal Reserve intends to support low interest rates, but some critics worry that inflation may increase because the money supply is growing.
Currently, long-term interest rates average 2.68 percent. The Federal Open Market Committee anticipates a growth of only 0.25 percent, and that is an appropriate growth as long as the unemployment rate remains over 6 percent.
Interest Rate Recommendation
As an advisor to President Obama, Learning Team C would request to sit at one of the eight Federal Open Market Committee meetings to understand more thoroughly the data collected by the Federal Reserve Banks and staff of the Federal Reserve. Understanding the intentions of the Federal Reserve is to maximize employment, stabilize prices and moderate long-term interest rates, our team understands the complexities of monetary policy. However, in the simplest form we support a gradual increase of interest rates so the availability of credit and loans does not cause new financial bubbles. We recommend following the Taylor Rule as the United States is recovering and returning to normal times.
Unemployment
Unemployment is when people are out of the labor market and are actively looking for work. When people are not actively employed their demand for wants and some needs decreases. Money is spent on essential needs and necessity, rather than luxurious desires.
According to the Bureau of labor and Statistics the unemployment rate is currently 7.7 percent. The unemployment rate has lowered from the previous year. Unemployment has a major role in aggregate supply and demand. When times are hard, businesses look for ways to decreases on expenses to solvent. In some cases, businesses are unable to reduce expenses and still turn a profit, thus having to close down. When this happens many people lose their jobs and the number of unemployed increases. When unemployment rates are high, there is less money to be spent in the market place which results in a flat economy. In contrast, when the unemployment rate decreases, consumers have more money to spend and the economy is stimulated.
This phenomenon is illustrated by the aggregate demand curve, which shows how a change in the price level will change aggregate expenditures on all goods and services in an economy. When the demand decreases, the aggregate demand curve will shift to the left. Unemployment reduces the number of workers in the labor market, so a decrease of people working will shift the aggregate supply curve to the left.
Unemployment Recommendation
Learning Team C would recommend to the president that production jobs must be returned to the United States. Since businesses are looking for ways to save money, they are outsourcing production to other countries for a cheaper price. Ninety-five percent of goods are produced elsewhere and imported to the United States. On the rare occasion when a consumer sees the “Made in the USA” on a product there is often surprise.
Another recommendation to the president would be to develop stimulus programs and tax breaks for small business. Many entrepreneurs have innovative and reasonable business ideas but are scared to invest in a business knowing it may fail. Developing more small businesses in the United States will allow more workers to stay in the job market.
Expectations
The general public has expectations that the government will improve the current economic state but many individuals do not feel their expectations will be reached. The unemployment rate and sales within the country have both exceeded the expectations, especially in the short period of time that they have increased. Just in the second quarter of year 2012 the economy grew 1.3 percent, which indicates