What is the current macroeconomic situation in the U.S?
The macroeconomic situation in the US is currently faced with high inflation rates, which paint a gloomy picture to many US citizens (Baumol & Blinder, 2011). In the recent past, the US has come out of a recession that affected the whole globe, which without government intervention could have been worse. Fears have been mounting in the recent past of another possible recurrence of the recession (Seidman, 2003).
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As the fears of the economic recession increase, there is general inflation, which is making unemployment to rise. Most citizens are however fretting over the skyrocketing mortgage costs. The US has been trying to overcome the hurdles of unemployment and inflation, by trying to avoid another recession (Baumol & Blinder, 2011). Out of the three leading economic problems the US is facing, inflation tops the list. Unemployment, the housing market, and depression are on the lower scale and can be solved through quantitative easing.
The unemployment rate in the US has been high, approximately 8.6% in mid-March this year. High inflation rates are parallel with stagnating GDP growth, and the national debt is on the rise and exceeds 14 trillion dollars. Inflation, which is a persistent increase in the prices of commodities, increases the cost of production of goods and services, which in turn increases the expenditure of manufactures. To minimize the high cost of operation, these firms reduce the labor cost by laying –off some workers, hence increasing unemployment (Ashraf, Gershman, & Howitt, 2012).
The current recession and anticipated physical cliff were a result of the issuance of adjustable-rate mortgages and collateralized debt obligations (Bergsten, 2005). American’s confidence in the economy has been on the decline. The positive momentum that has been witnessed in the past is slowly declining, based on the current economic situation. The US has to brace itself for the worst economic situation, due to the slow growth in the economy and the high unemployment rate (Elwell, 2011).
The surging government debt and poor spending policies have undermined private sector confidence. The high-interest rates have led to people being unable to pay their loans in due time. Housing and consumer spending have been unresponsive and weak to the stimulus package related to macroeconomics. To salvage itself out of this hard economic situation, the US government has to effectively apply expansionary fiscal policy tools such as tax cuts and an increase in governing expenditure/spending. The Federal Open Market Committee (FOMC) should also come up with the most appropriate easy money policy tools to ensure that the open market operations are in order, such as altering the interest rates.
Construction employment has declined since the housing peak. This decline has been facilitated by collapsing business investments and infrastructural government spending (Elwell, 2011). Data trends on unemployment clearly show that the increasing unemployment rate has been one of the key contributors to the poor macroeconomic situation in the US (Baumol & Blinder, 2011). Bank lending has been identified as the major limitation to the expansion of businesses because as the bank lending weakens, product demand also weakens. This is because when banks reduce the amount of money they lend to customers, there is less money in supply to the public, which in turn reduces the purchasing power of customers, hence reducing product demand.
The most appropriate monetary and fiscal policies
There are several US monetary and fiscal policies that are significantly directed to maintain long-run sustainable checks. The fiscal policy in the US requires a change, to provide the necessary roadmap to financial responsibility (Bergsten, 2005). Temporary programs and a deficit in the spending targets must be instituted. As a result of the foremost global economies rebounding to the steady-state albeit the slow pace, the global macroeconomic policies are variable. Notably, the US monetary and fiscal policies maintain a short-run focus, which is driven by high unemployment and inflation rates (Bergsten, 2005).
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The federal policy’s responsibility to the deplorable macroeconomic situation is to provide liquidity through other alternative means (Elwell, 2011). These alternatives include injecting more money in the financial system, lowering of the high-interest stress, and quantitative easing. This will help end the crisis and bring a stimulatory effect on the economy (Baumol & Blinder, 2011). The federal policy can also provide the fiscal stimulus package, which can provide the necessary impetus to economic growth. This package can help in infrastructure spending and investment. The government can also help in addressing long-budget imbalances (Seidman, 2003).
The imbalances in the budget result in tax hikes for compensation, which in turn negatively affect the economy. These tax hikes would damage the economy and impede the reverse progress, which would negatively influence government finances (Elwell, 2011).
The asset purchase can be used as an alternative method for an ordinary monetary policy. Though sometimes viewed as unconventional, the recent financial market impacts have been conventional with high inflation, depreciation of the dollar, and an increase in the equity prices (Baumol & Blinder, 2011). The purchase of the treasury securities when they are fully mature can help at easing the downward pressure on the nominal interest rates.
The inflation that is being experienced in the US should be given serious consideration. The unemployment trend in the US was significantly larger during the global recession, with the real GDP growing at a slower pace since the recovery (Bergsten, 2005). However, the striking feature is that of lack of job creation and persistently high unemployment rates. All the policymakers target healthier economic performance, which is characterized by strong growth and low unemployment rate. To solve the issue of bank lending, the use of administrative means rather than relying on monetary stimulus must be implemented (OECD Economic Outlook, 2010).
Ashraf, Q., Gershman, B., & Howitt, P. (2012). How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation. Web.
Baumol, J. W., & Blinder, S. A. (2011). Macroeconomics: Principles &Policy. Connecticut: Cengage Learning.
Bergsten, C. F. (2005). The United States and the World Economy: Foreign Economic Policy for the Next Decade. Washington: Peterson Institute.
Elwell, K. C. (2011). Depreciating Dollar: Economic Effects and Policy Response. Darby: DIANE Publishing.
OECD Economic Outlook. (2010). General assessment of the macroeconomic situation. OECD Economic Outlook, 2010 (2), 13-58.
Seidman, S. L. (2003). Automatic Fiscal Policies to Combat Recessions. New York: M.E. Sharpe.