May 1

The Current State of the American Economy

Matthew May
December 15, 2015
Professor Noto

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When the United States declared its independence from Britain in 1776,
the nation had to transition from being thirteen individual colonies to one unified,
independent nation. One of the main decisions the founding fathers faced was
what type of economy to establish in their new nation. They wanted to put an
economy in place that would last throughout time. The basis that they created is
still in place, but now our economy has evolved over time. It is now one of the
most complex and multifaceted economies in the world. In the past, there have
been a few tragic blows to our economy, the two biggest being the Great
Depression in the 1930s and the Great Recession that began in 2007. Since
the Great Depression, our government has focused on trying to find the right
combination of monetary and fiscal policies to enhance and sustain growth in the
economy, and the price of goods in the economy (White). In order to prevent
these tragedies from reoccurring, our nation has keep growing and producing.
Now, the two main goals of our nations economy are to limit the amount of
unemployment and inflation. The two primary tools used by the United States to
maintain full employment and stable prices are our nations fiscal an monetary
policies, and they are essential in meeting our short and long term economic
goals.
The fundamental economic problem that our economy revolves around is
scarcity; unlimited human wants in a world of limited resources. Scarcity is
inevitable because there is a finite amount of resources in the world, but our
economy fights against it (Tucker). The three resources that our economy uses
are land, natural resources provided by nature, labor, mental and physical

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capacity of workers to produce goods and services, and capital, which can be
human, financial or physical. Scarcity creates the three economic questions,
what to produce, how to produce, and for whom to produce to (Tucker)?
The laws of supply and demand answer the economic questions caused
by scarcity. Supply is what sellers put in the market, and demand is choice
making behaviors of buyers in a market. The consumers run our economy, so if
consumers demand particular goods and services, then the producers will supply
those goods and services. In the market, if the demand of a good is high, then
the suppliers will drive the price up, but if the demand of a particular product is
low, then the producers will lower the price. The law of demand states that there
is an inverse relationship between the price of a good and the quantity buyers
are purchasing, whereas the law of supply states that there is a direct
relationship between the price of a good and the quantity being supplied
(Tucker).
The most important goal of the economy is to maintain full employment
and to keep inflation rates low. The country is at full employment when the
unemployment rate is between four and six percent. There are five types of
unemployment, frictional, seasonal, cyclical, technological and structural, but the
only types that are calculated in the unemployment rate are cyclical,
technological and seasonal. Inflation is the general increase in the price of goods
and services. When inflation occurs, the dollar loses value, and when the value
of the dollar in our economy decreases, it costs more for consumers to purchase
goods and services. When unemployment and inflation are both high, our

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economy experiences stagflation. This is what occurred in our economy during
the Great Depression and the Great Recession.
The United States economy has grown ever since it was established, and
it continues to grow today. Economic growth occurs whenever people take
resources and rearrange them in ways that make them more valuable (Romer).
It can be measured by looking at our Real Gross Domestic Product (Real GDP).
Real GDP measures the value of economic output adjusted for inflation. Every
four months, The United States Chamber of Commerce comes out with quarterly
reports on economic growth. Since the second quarter, Real GDP has increased
by an annual rate of 2.1 percent (U.S). There are several reasons why our
economy has grown this past quarter, one of them being more of a balance of
trade. We are exporting more and importing less than we were previously
(Schwartz). This generates more money into the economy, while at the same
time spending less to bring in goods.
In order for an economy to succeed, it has to be efficient and productive.
An efficient economy produces as much as it can while using the fewest amounts
of resources as it can to maximize profit. The advancements in technology have
made it easier for businesses and industries to be more productive. In the last
quarter, nonfarm business sector labor productivity increased at a 2.2 annual
rate, and the manufacturing sector of labor productivity has increased by 5.1
percent in the third quarter of 2015 (Productivity). This increase in production is
a good sign for the economy, but in order for our country to keep becoming more

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efficient and productive, we have to keep innovating new forms of technology
that help with production.
We currently are achieving full employment here in the United States. Our
unemployment rate is hovering at approximately five percent, which lies in
between the four and six percent goal (Productivity). The more people employed
in the economy, the more money is generated in the economy. Over the past
year, approximately one million more individuals became employed
(Productivity). This has a direct correlation to the increase in Real GDP and
productivity our nations economy is seeing.
Prices amongst goods and services have been stable as well. The
current inflation rate in the United States is .17 percent (Romer). The inflation
rate is calculated using the consumer price index, which is an index that
measures the change in average prices of goods and services. There are two
types of inflation, the first is cost push, which is caused by an increase in the
price of goods, and the send is demand-pull, which is caused by an increase in
income amongst consumers. The reason why our low inflation number is good is
so consumers know the value of their money, and their money goes a longer
way. When inflation is low, consumers are purchasing more goods and services
and have a higher demand for these goods and services, so they not only
benefit, but producers do as well.
One of the main tools our economy has in order to succeed is its fiscal
policy. The United States fiscal policy covers how much the government taxes,
how much the government spends, and the nations budget. The plan is in place

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to affect the level of aggregate supply and demand in the economy. Aggregate
supply is the total amount of goods and services available in the economy, and
aggregate demand is the total amount of spending on goods and services in the
economy, consisting of consumer spending, government spending and
investment spending. The two types of fiscal policies are expansionary, which
expands the money supply and decreases taxes to encourage economic growth
to combat inflation, and contractionary, which is enacted by a government to
reduce the money supply and raise taxes, and ultimately the spending in a
country in order to combat unemployment (Tucker).
One of the primary parts of our nations fiscal policy is our national debt
ceiling. This puts a cap on the amount of national debt our economy can endure.
The legal obligations associated with the national debt are social security,
Medicare, military salaries, interest on the national debt, tax refunds, and other
payments (Debt). Our economy is approaching the debt ceiling, and it may lead
to another financial crisis and threaten the jobs and savings of American citizens.
This would put the economy in a hole, similar to what it was right after the Great
Recession (Debt). The U.S owns the majority of its own debt. Forty-two percent
of the debt is public-sector debt, which is owned by federal, state and local
governments, twenty-seven percent is public-sector debt, which is owned by
individuals, banks and corporations, and thirty-one percent of our nation debt is
owned by foreign countries. The two foreign counties that own the majority of the
thirty-one percent are Japan and China (Tucker).

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Our current national debt is just over 18.7 trillion dollars, and it is growing
every second. Three ways to fight against the national debt are increasing taxes,
such as income and corporate taxes, putting a spending cap on the economy,
and increasing the debt ceiling. If taxes increase, then the government would
have more money so the debt would decrease, and if a spending cap is in place
that would limit the amount government can spend, also decreasing the debt.
The sequester effect of automatic tax cuts also contributes to the national debt.
If automatic tax cuts are given to business owners along with others, than the
government cannot use the money generated from those taxes to battle against
the climbing national debt.
The U.S budget is a main tool of its fiscal policy. There are two types of
spending in the fiscal policy; there is mandatory spending, which makes up sixty
percent of all spending, and there is discretionary spending, which accounts for
forty percent of all spending (Tucker). The proposed total spending for this fiscal
year is 3.9 trillion dollars. Thirty-three percent of total spending is social security,
unemployment and labor, twenty-seven percent is Medicare and health, sixteen
percent is military spending, and the other twenty-four percent is designated
towards transportation, agriculture, education, housing and energy conservation
(Presidents).
The second main tool of the U.S economy is its monetary policy. The two
primary goals of monetary policy are to maximize employment and minimize
inflation. The Federal Reserve controls our nations monetary policy. The three
main tools of monetary policy that help achieve these goals are open market

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operations, discount rate and reserve requirements. Open market operations
refer to the government buying and selling U.S government securities. The
Federal Open Market Committee (FOMC) conducts the operations, and it
consists of the seven members of the federal board and five Federal Reserve
Bank presidents. If the Federal Reserve wants to put money into the economy to
help stimulate employment, then the government essentially writes a check on
itself (Tucker). This is representing an expansionary monetary policy. If the
government wants to take money out of the economy to decrease inflation, then
the government sells some of its securities, which is representing a
contractionary policy (Monetary).
The second tool of the monetary policy is the discount rate, which is the
interest rate the federal government charges banks to borrow money. The
current discount rate is 0.75 percent. The discount rate is a useful tool because
it generates money into the economy, but if the rate is too high, then banks will
not get loans directly from the government, hindering the amount of government
revenue.
The third tool of the monetary policy is reserve requirements; this is the
amount of reserves banks have to keep in them. The total amount of reserves
depends on how much deposits are in the bank. If the government wants to
implement a contractionary policy, it would raise the reserve requirements so
there is more money saved and less circulating in the economy. If an
expansionary policy were in place, then the government would lower to reserve
requirement so there would be in increase of money supply. The reserve

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requirement now is ten percent; so all banks have to keep ten percent of all
deposits in the bank. They cannot loan that ten percent out.
About six weeks ago, Federal Policy makers voted to keep interest rates
at their record low of zero to 0.25 percent, where they have been ever since the
Great Recession (Neate). At this point in time, chairman of the Federal Reserve
Janet Yellen believes that interest rates would soon increase due to the
improvement in the economy. Our economys unemployment rate is good, along
with its inflation rate, so other than our massive national debt, everything is
running pretty smoothly right now, so the consumers can afford to give up a little
more in interest rates to help the government chew away at the national debt.
The new interest rate is expected to increase to up to 0.9 percent (Monetary).
The outlook of the U.S economy is optimistic. Since the Great Recession,
we have taken tremendous strides in achieving economic prosperity once again.
Since the Great Recession, thirteen million new jobs for Americans have been
created. When more people are working, there is more money being circulated
through the economy. The massive amount of national debt is a real concern.
During the Clinton Administration, the nation did not have a national debt, but
rather a national surplus. I believe that in order for our economy to once again
thrive, we have to decrease our nation debt substantially.
I believe that in the long term, our economy will continue to develop and
grow, despite our massive national debt. We are just beginning to fully recover
from the Great Recession, so since we have dug out of that whole, we can step
forward as an economy and get back to being a very efficient, productive

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economy. I think that in order to get rid of the national debt, our government has
to spend less, but as a result they will tax the people more to generate more
money. Unemployment is down to five percent, and inflation is .17 percent, so
our economy is getting back to where it was prior to the Great Recession. The
United States is the most powerful country in the world politically and
economically, so I believe that we will continue to improve our economy in both
the short and long term.

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Works Cited
"Debt Limit." Debt Limit. U.S Department of Treasury, 8 Dec. 2015. Web. 11 Dec.
2015.
Monetary Policy Basics. Monetary Policy Basics. U.S Federal Reserve, n.d.
Web. 22 Oct. 2015.
Neate, Rupert. Federal Reserve keeps interest rates unchanged but hints at
December rise. New York, New York: The Guardian, 28 October 2015.
Print
"Productivity and Costs, Third Quarter 2015, Revised." U.S. Bureau of Labor
Statistics. U.S. Bureau of Labor Statistics, 2 Dec. 2015. Web. 10 Dec.
2015.
Schwartz, Nelson D. "U.S. Economy Grew at 2.3% Rate in 2nd Quarter." The
New York Times. The New York Times, 30 July 2015. Web. 10 Dec. 2015.
The Presidents Budget for Fiscal Year 2016. The White House. The White
House, n.d. Web. 22 Oct. 2015.
Tucker, Irving B. Macroeconomics for Today. 8e ed. Mason, Ohio: SouthWestern, 2014. Print
"U.S. Economy at a Glance: Perspective from the BEA Accounts." U.S.
Economy at a Glance. U.S Department of Commerce, 10 Dec. 15. Web.
10 Dec. 2015.

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