Economic_Conditions_Paper

The US economy is combined of many leading factors influencing the dynamics of the market conditions. They affect how the markets respond with respect to their statistics and implementations. The economic conditions are influenced by to the rate of unemployment reflecting economic growth, and the measurement of the Gross Domestic Product (GDP). The government is using fiscal policy to create expenditures and revenue collections to influence the economy, as well as actions to control the money supply to the markets by implementing monetary policy by Federal Open Market Committee (FOMC). High rate of unemployment There is a high rate of unemployment which seems to be more of a problem than the high rate of inflation. The reason it seems that unemployment is such a problem is because if the citizens do not have income, there will be an increase in poverty and the funding available for benefits will be decreased sooner than later. Not to take anything away from the high rate of inflation which is also a problem, but without the jobs to make money there will be nothing to spend it on no matter the cost. According to the Bureau of Labor Statistics, the March 2010 rates for unemployment reflected an increase for forty four states including District of Columbia based on a year earlier (Bureau of Labor Statistics). Economic growth Economic growth is defined as a positive change within the production of goods and services by a country during a defined period of time. Economic growth is normally measured as a percentage with the difference or change in real GDP (Gross Domestic Product) from one period to the next. (Guardian) In the text, the author discusses the GDP for thirteen countries with a chart to show the differences from one country to the next and an overall outlook. The GDP is used to measure both the total income earned within the economy along with the total expenditure based on the output of goods and services. (Mankiw) Fiscal Policy When the economy is in a recession one way the government uses fiscal policy to give it a boost is by injecting more money into it by giving consumers a tax break on their individual taxes. This drives down interest rates, increases employment and encourages consumers to buy more. The combination of all the things listed above increases the overall output. President Kennedy used fiscal policy in the 1940s to prevent a recession. Apart of his, “proposal” was an investment tax credit, which gave a tax break to firms that invest in new capital. Higher investment would not only stimulate aggregate demand immediately but would also increase the economy’s productive capacity over time. Thus, the short-run goal of increasing production through higher aggregate demand was coupled with a long-run goal of increasing production through higher aggregate supply.” (Mankiw. p. 794 &795). When a President uses fiscal policy to stimulate the economy it is to help bring it back to stabilization and avoid a recession. Monetary Policy The Federal Reserve has two important responsibilities. The first is to regulate banks and ensure the health of the banking system. The second and more important job is to control the quantity of money that is made available in the economy, called the money supply. According to Principles of Economics (ch29. 649), decisions by policymakers concerning the money supply constitute monetary policy. At the Federal Reserve, monetary policy is made by the Federal Open Market Committee (FOMC). The FOMC meets about every six weeks in Washington, D.C., to discuss the condition of the economy and consider changes in monetary policy. Through the decisions of the FOMC, the Fed has the power to increase or decrease the number of dollars in the economy (Mankiw, 2007). The Fed has three types of monetary strategy to influence the money supply which are; open-market operations, reserve requirements, and the discount rate. The Fed conducts open-market operations when it buys or sells government bonds. To increase the money supply, the Fed instructs its bond traders at the New York Fed to buy bonds from the public in the nation’s bond markets. To reduce the money supply, the Fed does just the opposite: It sells government bonds to the public in the nation’s bond markets. The Fed also influences the money supply with reserve requirements, which are regulations on the minimum amount of reserves that banks must hold against deposits. Reserve requirements influence how much money the banking system can create with each dollar of reserves. An increase in reserve requirements means that banks must hold more reserves and, therefore, can loan out less of each dollar that is deposited; as a result, it raises the reserve ratio, lowers the money multiplier, and decreases the money supply. Conversely, a decrease in reserve requirements lowers the reserve ratio, raises the money multiplier, and increases the money supply (Mankiw, 2007). The last strategy to influence the market is the discount rate. Mankiw, (2007) stated that “the Fed can alter the money supply by changing the discount rate. A higher discount rate discourages banks from borrowing reserves from the Fed. Thus, an increase in the discount rate reduces the quantity of reserves in the banking system, which in turn reduces the money supply. Conversely, a lower discount rate encourages banks to borrow from the Fed, increases the quantity of reserves, and increases the money supply.”