The Rise And Fall Of The American Economy Coursework

The Rise And Fall Of The Ameri rear end Economy - Coursework ExampleIn the US economy, there is a high level of un involvement and the interest order in the economy are almost down to zero. The inflation is about 2% per year and the Gross domesticated Product (GDP) is increasing at less than 3% per year. It is necessary to raise the GDP growth to about 3% per year while keeping the sum ups of unemployment and inflation low in the economy. Economic depression in an economy can be controlled by the formulation of effective monetary and fiscal policies. part the Fiscal Policy is administered by the American Government, the Federal Reserve (the Central Bank of America) possesses the power to implement the monetary policies in the economy. These policies are based on a number of laws and theories Okuns Law and the Phillips sprain are two such important theories. The Okuns law states that when actual output grows faster than emf output, unemployment rate in an economy, decreases and vice versa. The rate of output (GDP) growth corresponding to the stable rate of unemployment is then considered as the growth rate of the economy. Thus, it is the empirical parity between the output gap and the unemployment rate. (House of Representatives, USA, p.44) Phillips Curve shows the negative relationship between the unemployment rate and inflation rate in the economy. This implies that in order to reduce unemployment, most amount of inflation has to be tolerated or inflation can be reduced at the cost of rising inflation. (Tucker, 2011, p.453) Wages was not taken as a component of the Phillips curve as in the presence of unemployment, the bargaining power of labor is almost non-existent and thus, wages cannot be considered a key variable. However, Phillips Curve is a short-run phenomenon and there is no trade-off between inflation rate and unemployment rate in the long-run. (Mankiw, 2009, p.789) These two theories are indispensable to study monetary and fiscal policies b ecause they show the relation between output, inflation and unemployment in an economy. A General Framework The GDP of a country is the sum total of the determine of all the goods and services produced within the geographical boundaries of a country in a particular year. Keynesian economics states that GDP can be denotative as the sum of the Consumption expenditure, the investment expenditure, the government expenditure plus exports minus imports. The equation can be expressed as GDP = C + I + G + (X M) (1) where C Consumption expenditure of the households I Investment expenditure G Government expenditure X think of of exports M value of imports Equation (1) represents the real side of the economy where the concerned variables are all real variables. Fiscal Policy The Government can alter the level of output, consumption, employment and aggregate demand in an economy, using the two main instruments of fiscal policy taxation and government spending. Keynesian economists believe that fiscal policy has a more straightforward and immediate impact compared to monetary policy (Genovese, 2010, p.160), as it affects the real sector of the economy, rather than the monetary sector. Expansionary Fiscal Policy Equation (1) can also be expressed in terms of personal disposable income of the household sector as Thus, GDP = C (y t.y) + I + G + (X M) where y income of the households t income tax rate in the economy (y t.y) disposable income of the households Therefore, GDP = C y (1-t) + I + G + (X M) (2) When there is a high rate of unemployment in the economy, the Government can reduce the tax level in the economy i.e. the Government reduces t in the economy. When t is reduced, the consumers are required to render less amount of their income as tax which increases their disposable income. The households consumption expenditure which is a function of their disposable income, naturally record a rise. In the equation (2), as a result of the decrease in