Fiscal & Monetary Policy Given the Current Macroeconomic Situation in the United States DeVry University
Instructor: Professor Bergan
June 16, 2013
The macroeconomic situation in the United States can be determined by looking at what part of the business cycle the economy currently falls within. According to McConnell, Brue & Flynn (2012) “Business cycles are alternating rises and declines in the level of economic activity, sometime over several years” (p. 527). A typical business cycle consists of a peak, a recession, a trough and an expansion. To determine what point in the business cycle the United States currently falls into it is important to look at several factors such as gross domestic product (GDP), income, inflation and unemployment. Knowing what the current macroeconomic situation is will determine what fiscal and monetary policies would be appropriate.
In looking at the GDP from 2007 to 2013 first quarter on the Bureau of Economic Analysis website the GDP has gone from 0.5 to 2.4 with a low of -8.9 in the fourth quarter 2008. This would indicate that the United States is in a period of recovery. Looking at incomes over the period for 2007 to 2013 first quarter the average weekly income according to the Bureau of Labor Statistics website has gone from $620 to $773. This would also indicate that the United States is in a period of recovery. In looking at unemployment rates on the Bureau of Labor Statistics website from 2007 to 2013 first five months the percent of unemployed workers has gone from 4.1 in 2007 to a high of 8.5 in 2009 and 2010 back to 6.8 on average in the first five months of 2013. This shows a definite decline in the unemployment rate. Knowing the inflation rate is also important in determining the macroeconomic situation. Using the consumer price index that is published monthly by the Bureau of Labor Statistics it can be determined whether the price of goods has increased or decreased. If the prices are increasing too much there would be a need to fight inflation and use contractionary fiscal and monetary policies. In looking at the inflation rates for the period 2007 to 2013 first quarter using the Bureau of Labor Statistics consumer price index the inflation rates have gone from 4.1% in 2007 to 1.1% in the first quarter 2013. This supports the fact that the economy is in a state of recovery. Taking the factors of GDP, income, inflation and unemployment into consideration confirms that the United States macroeconomic situation is in a period of recovery.
According to McConnell, Brue & Flynn (2012) “Fiscal policy is changes in government spending and tax collections designed to achieve a full-employment and noninflationary domestic output” (p. G-10). Since the United States is in a period of recovery expansionary fiscal policy would be the most appropriate to continue to help the economy reach its optimum level of full-employment without causing inflation. The use of expansionary fiscal policy would put more money in the hands of consumers by increasing government spending and decreasing taxes. Increasing government spending in the form of subsidies and transfer payments allows consumers to have more money to spend on products. Cutting taxes is an important fiscal policy tool that works to also allow more money for consumers to spend. The tax cuts must be large enough and last long enough for people to feel comfortable in spending the extra money instead of saving it.
According to McConnell, Brue & Flynn (2012) “Monetary policy is a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full-employment, and economic growth” (p. G-17). Since the United States is in a period of recovery expansionary monetary policy would be the most appropriate policy to help the economy continue to recover. With the use of expansionary monetary policy the Fed puts money in the hands of the consumer...
References: McConnell, C.R., Brue, S. & Flynn, S. (2012). Economics: principles, problems, and policies
(19th ed.). New York, NY: McGraw Hill Learning Solutions.
Reuters (2013). CNBC. Volcker Weighs In on Limits of Fed 's Easy Money Policies. Retrieved
U.S. Department of Commerce, Bureau of Economic Analysis. (2013). National income and
product accounts tables. Retrieved from
United States Department of Labor, Bureau of Labor Statistics. (2013). Databases, tables &
calculators by subject. Retrieved from http://data.bls.gov/cgi-bin/surveymost
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