The American economy in in a very good state at present. Unemployment for 2006-2007 was lower than at the same points in the previous year. The quarterly GDP rate rose during 2007. No recession has occured nor is there a sign of one despite the recent credit crunch. If there was a recession, the easy money policy would be put into affect. This is discussed along with the Discount Rate. (Finkelstein et al. 2008) CPI, or Consumer Price Index, was relatively steady during this period of time. There were only four months of negative CPI during 2006-2007. The highest point was in March of 2006 reaching 0.
588, while the lowest point was found in October of 2005 at -0. 337. This is the main measure of inflation in the United States, which is done by the Bureau of Labor Statistics. (Gutmann, 2007) The Discount Rate increased in small numbers during the first five months in 2007. This would most likely mean that the Fed (Federal Reserve System) was trying to build their reserves which would discourage commercial banks from borrowing from Federal Reserve Banks. This is known as a tight money policy when the overall objective is to tighten money supply to reduce spending and control inflation.
The remainder of the year in 2006 the Discount Rate stayed at 6%, which is the highest point during 2006-2007. In the year 2007 the Discount Rate was steadily decreasing. This indicated that the Fed was trying to get commercial banks to borrow more resources. This is part of the easy money policy, in which bank loans become more available as well as less expensive thus making them more attractive. This would increase demand and employment. The easy money policy is acted on when the economy is on or near a recession and unemployment is high. In December of 2007, the Discount Rate reached a low
of 1. 33%. Demand obviously grew due to the considerably low rate. (Finkelstein et al. 2008) Lastly, the M2 money supply had steadily increased throughout the period of 2006-2007. An increase in money supply creates a surplus of money that is temporary. This would result in a higher demand for bonds. The bond prices would go up and would lower interest rates. Due to the low interest rates, people would try to decrease the money that they hold by buying the bonds. Money is supplied by monetary authorities. In the United States, our monetary authorities are members of the Board of
Governors of the Federal Reserve System, commonly known as the “Fed. ” (Gutmann, 2007) During 2006-2007, the economy did in fact change from the years before it. Overall, this period was relatively good considering that there were no recessions. The Discount Rate was also good considering the noticeable decrease during 2007. Even though in the years to come there may be recessions, there may be high Discount Rates, or high unemployment. Regardless of what negative actions happen to the economy, there are ways of controlling them through the policies of our authorities.
Optimistically thinking, new ideas will arise from the years to come to better what policies have already been established which will make for a steadier and stronger positive growth to the U. S. economy. (Finkelstein et al. 2008) Moving onto the issue of market failures and to improve the health of the economy: when the private firms do not provide goods and services or the quantity provided is below what is socially desirable. Government intervenes to provide the necessary goods and services such as electricity, water, health care system, which are beneficial to the whole community.
Inequality tends to become entrenched in market economy. Child growing up in low-income family does not have the same access to information resources or educational assistance as a child from wealthy family. Financial pressure means their parents cannot support them through higher education. Without further education they risk in low paid position all their life. Government tries to remove these factors behind inequality by introducing universal access to free education, living allowances etc. to make sure that cost is not a barrier for people from receiving higher education.
Government creates a more equitable society by redistribution of income through the tax and welfare system. Income tax is levied on progressive scale: rates of tax increases as income increase. Government then transfers payment to lower income earners through the welfare system. In addition government also intervenes in the labor market to redistribution, and impose minimum wage levels. (Finkelstein et al. 2008) -Economic stability. Without any government intervention, a free market economic system is like to experience severe fluctuations in levels of economic activity.
Government intervenes in market economy through fiscal policy and monetary policy to minimize economic instability and its harmful effects such as inflation and unemployment. Monetary policies involve the Reserve Bank, acting on behalf of the government, to influence the level of interest rates and supply of money. By influencing these variables, government is able to influence the overall level of economic activity. The main instrument of monetary policy is the use of buying and selling government securities, in order affects the cash rate of interest and influences the level of interest rates.
The government tightens or loosens the monetary policy to slow down or increase the level of economic activity. Fiscal policy focuses on budget outcomes. Expansionary fiscal policy (deficit budget): government reduces taxation revenue or increases expenditure to stimulating demand and increase level of economic activity. Contractionary fiscal policy (surplus budget): government increases taxation revenues and decrease government expenditure to decrease level of economic activity. Neutral fiscal policy (balanced budget): The budget should have no overall effect on level of economic activty or aggregated
demand. (Botti, 2006) Throughout the history of the world, there has never been a boom in the economy as there was in the April of 2006. The only time period that it can be contrasted with is the Roaring Twenties. During this post war time period, the economy had just started to build momentum. Now that everyone was home, working and making money, there was a great opportunity for people to start investing. There was no place better to put there money than in the stock market. After all, in those days one could buy stock on only 10% margin, meaning 10% layout and 90% of the stock on loan.
This is actually how the market began to climb its magnificent ascent. When people would invest this ten percent, they would quickly make profit and be able to pay the ninety percent loan. This process of buying on margin and speculation became the routine of everyone during the twenties. This indeed became very dangerous. As the cycle continued, people were just taking on themselves more and more debt. Nobody thought that those good times could come to an end, but like all good things they do. (Botti, 2006) Instead of people preparing for such a catastrophe, they were optimistic.
In fact several days before the crash, the market went down approximately 500 points and then came all the way back into positive ground right before the weekend. During that weekend people were panicking and this eventually led up to that notorious Black Tuesday. Then the infamous bankruptcy cycle began. Because people had left all their eggs in one basket, that being the stock market, they lost all their money. This in fact led to the record number of foreclosures and eventually left the banks of America bankrupt. (Gutmann, 2007)
It is not truly understood how the majority of economists and analysts on Wall St. do not see anything pessimistic occurring in the near future. We have recently just emerged from a very minor recession caused by the illogical boom credit. Most people think now that it is just time to move on to bigger and better things, while the latter is just happening again but this time in the real estate sector of the economy. Unbelievably, It had recently shown in an article in the Wall Street Journal entitled, “Buy on Margin, Technology is Ready for Another Ride. “.
No one knows where the economy will lead to from here on in. Gutmann, 2007) works cited What’s The Matter With The US Economy? by Peter Gutmann – Oct 16, 2007 The United States and the World Economy by C. Fred Bergsten – Jan 24, 2005 Envy of the World: A History of the US Economy and Big Business (HC) by Timothy , J. Botti – Jul 1, 2006 he Fattening of America: How The Economy Makes Us Fat, If It Matters, and What To Do About It by Eric A. Finkelstein and Laurie Zuckerman – Jan 9, 2008 Growth, Accumulation, and Unproductive Activity: An Analysis of the Postwar US Economy by Edward N. Wolff – Dec 14, 2006