Maddie Boyer Period 4 Economics Essay Given the current state of the economy, the US government must implement

certain economic policies in order to strengthen it. The US economy is currently in a recession and requires more growth to succeed. According to the Bureau of Economic Analysis (BEA), the Gross Domestic Product (GDP) of 2013 was +3.2% (Sharf). The GDP is the primary indicator of the health of an economy. Its determined by the amount of consumption, expenditures, exports and imports compared to the year before (What is GDP and Why Is It so Important?). A stable economy is believed to show a +6% growth. In order reach a growth of +6%, there must be a balance between the rate of unemployment and inflation. Inflation is determined by the Consumer Price Index (CPI) which measures the rate of spending of consumers compared to the previous year (Consumer Price Index). Considering the fact that 6.7% of the US population is unemployed while prices are rising above wages by only 1.5% more than last year, the US economy must grow in order to circulate more money in the economy, raise inflation and lower the unemployment rate (Labor Force Statistics from the Current Population Survey). The US economys unemployment rate is so colossal because of the low economic output. Americans are making fewer products and, therefore, companies make a smaller profit, there is a smaller money supply, and there is a lower demand for goods so the economy slows down (High Unemployment Rate). Often times, when the economy has a high unemployment rate, it has a low inflation rate, and vice versa (Unemployment Vs Inflation). This is largely due to the amount of money available for the consumer to spend. When a great amount of people are unemployed, they will often have less money to spend. Since fewer people are participating in the economy,

businesses suffer and must lower prices to attract buyers. The government can finally strengthen the economy by manipulating its current fiscal and monetary policy to give more money to the consumers. Fiscal policy is the economic policy regarding taxing and spending in order to affect the economy. Monetary policy involves using the Federal Reserve to use different methods to affect the economy. Given the current economic recession, the US government must change its fiscal policy by lowering taxes and increasing spending, and its monetary policy by lowering the Reserve Requirement, selling T-bills, and lowering interest rates, thereby leaving more money with the consumers who can then invest in the economy and stimulate growth while still limiting inflation. By lowering the taxes on the public, the government can strengthen the economy. Although it reduces the amount of revenue the government receives, and therefore, limits the governments spending, it eventually can lead to a prosperous economy where the government is able to lessen its debt. As the taxes decrease, people dont have to spend as much on the government and more money remains with the consumers. When consumers have more money available to spend, they are more willing to buy new products. This results in an increased production of goods to meet the public demand. Companies will then hire and pay more workers to help increase production. This ultimately leads to a stronger economy where more people are employed. Government spending provides another method for strengthening the economy. When the government invests more money in businesses, the businesses are able to thrive and offer more jobs to the public. This allows for more people to be employed which would lower the unemployment rate and increase the money supply. As more Americans are employed, they have more money to spend and can circulate the money back into the economy. For example, when

the government invests in an environmental program to clean up the rivers, that program will then require workers to help clean it up. There will be more people employed and more people who can afford to spend money on other products. As more people are able to afford items, prices could rise faster than incomes, causing inflation. However, the current economic state requires a slight rise in the inflation rate in order to lower the unemployment rate. By spending and investing in the economy, the government will be able to both lower unemployment and raise inflation, which will lead to a period of economic growth that the economy desperately needs. Regarding monetary policy, the Federal Reserve is able to change the reserve requirement (RR), interest rates, and the amount of T-bills in the economy. The Federal Reserve, or Fed, is composed of the US central bank, 12 regional banks, a policymaking group known as the Federal Open Market Committee (FOMC), and Board of Governors members (The Structure of the Federal Reserve System). Within these banks, there are certain powerful tools that can be used to strengthen the economy. Using the reserve requirement, the Fed can change the percentage of deposits that banks must reserve at the Fed (Reserve Requirements). By lowering the reserve requirement, there is more money that remains at commercial banks. Once these banks have more money, they are more likely to authorize loans. The more loans there are, the more money people have to spend. They can then buy more products and help businesses to create more jobs. Altering the reserve requirement is incredibly powerful in affecting the economy yet it is used the least often. Only the Board of Governors in the FOMC has the ability to makes any changes regarding this tool. The Fed more commonly uses interest, or discount, rates to improve the economy. When the reserve banks loan out money to commercial banks, they charge interest that accumulates over time (Discount Rate). When the Federal Reserve

lowers the interest rates on loans to commercial banks, these banks have more money to loan to the public. When the public can borrow more money, they have the opportunity to spend more money and which can eventually create jobs and stimulate more growth in the economy. Even more frequent than changing the interest rates is buying and selling securities, or T-bills. This is how the government mostly obtains the money for its daily spending. This process involves the Fed, specifically the FOMC, selling these T-bills to businesses who compete on the basis of price (The Federal Reserve System). When the Fed sells T-bills, it borrows money from the economy and reduces reserves. Likewise when the Fed buys T-bills, it returns money to the economy and increases reserves. By far, this is the most commonly used, and perhaps weakest, method of the Fed used to affect monetary policy. The US economy is currently in a deep recession and requires some economic growth to strengthen it. The unemployment rate is ridiculously high while the inflation rate is kept very low. In order to stimulate growth in the economy, the govt. must lower the unemployment rate and steadily raise the inflation rate. The government can accomplish this through both fiscal and monetary policy. Using fiscal policy, the US must lower taxes and increase spending to increase the money supply and improve the economic status of this nation. Through monetary policy, the government must lower the reserve requirement, lower interest rates and buy more T-bills. Although there is no perfect way to improve the economy, these steps will be most effective in ending this recession and stimulating more growth.

Works Cited "Consumer Price Index." Bureau of Labor Statistics. N.p., n.d. Web. 27 Feb. 2014. <http://stats.bls.gov/cpi/cpifaq.htm#Question_1>. "Discount Rate." Federal Reserve. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/monetarypolicy/discountrate.htm>. The Federal Reserve System. In Plain English: Making Sense of the Federal Reserve. N.p.: n.p., n.d. Print. "High Unemployment Rate." Federal Reserve Bank of SF. N.p., n.d. Web. 27 Feb. 2014. <http://www.frbsf.org/education/publications/doctor-econ/2010/january/labor-marketunemployment-rate>. "Labor Force Statistics from the Current Population Survey." Bureau of Labor Statistics. N.p., n.d. Web. 31 Jan. 2014. <http://data.bls.gov/timeseries/LNS14000000>. "Reserve Requirements." Federal Reserve. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/monetarypolicy/reservereq.htm>. Sharf, Samantha. "U.S. GDP Grew 3.2% in the Fourth Quarter 2013." Forbes. N.p., n.d. Web. 31 Jan. 2014. <http://www.forbes.com/sites/samanthasharf/2014/01/30/u-s-gdp-grew-3-2-infourth-quarter-2013/>. "The Structure of the Federal Reserve System." The Federal Reserve Board. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/pubs/frseries/frseri.htm>. 'Unemployment Vs Inflation' .Researchomatic. N.p., n.d. 9, 2009. <http://www.researchomatic.com/Unemployment-Vs-Inflation-30840.html>. "What Is GDP and Why Is It so Important?" Investopedia. N.p., n.d. Web. 27 Feb. 2014. <http://www.investopedia.com/ask/answers/199.asp>.

Bibliography "Consumer Price Index." Bureau of Labor Statistics. N.p., n.d. Web. 27 Feb. 2014. <http://stats.bls.gov/cpi/cpifaq.htm#Question_1>. "Current US Inflation Rates: 2003-2014." Inflation Calculator. N.p., n.d. Web. 31 Jan. 2014. <http://www.usinflationcalculator.com/inflation/current-inflation-rates/>. "Discount Rate." Federal Reserve. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/monetarypolicy/discountrate.htm>. "Federal Open Market Committee." Federal Reserve. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/monetarypolicy/fomc.htm>. The Federal Reserve System. In Plain English: Making Sense of the Federal Reserve. N.p.: n.p., n.d. Print. "High Unemployment Rate." Federal Reserve Bank of SF. N.p., n.d. Web. 27 Feb. 2014. <http://www.frbsf.org/education/publications/doctor-econ/2010/january/labor-marketunemployment-rate>. "Labor Force Statistics from the Current Population Survey." Bureau of Labor Statistics. N.p., n.d. Web. 31 Jan. 2014. <http://data.bls.gov/timeseries/LNS14000000>. "Reserve Requirements." Federal Reserve. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/monetarypolicy/reservereq.htm>. Sharf, Samantha. "U.S. GDP Grew 3.2% in the Fourth Quarter 2013." Forbes. N.p., n.d. Web. 31 Jan. 2014. <http://www.forbes.com/sites/samanthasharf/2014/01/30/u-s-gdp-grew-3-2-infourth-quarter-2013/>. "The Structure of the Federal Reserve System." The Federal Reserve Board. N.p., n.d. Web. 1 Feb. 2014. <http://www.federalreserve.gov/pubs/frseries/frseri.htm>.

'Unemployment Vs Inflation' .Researchomatic. N.p., n.d. 9, 2009. <http://www.researchomatic.com/Unemployment-Vs-Inflation-30840.html>. "What Is GDP and Why Is It so Important?" Investopedia. N.p., n.d. Web. 27 Feb. 2014. <http://www.investopedia.com/ask/answers/199.asp>.

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