Macroeconomics_-_Monetary_Policy

Francis E. Crespo-Gonzalez ECON*5F70*010 April 6, 2011 Macro Economics Part I Monetary Policy: Monetary policy in the United States is the responsibility of the Federal Reserve ("The Fed"), the nation's central banking authority. Federal Serve policymakers encounter about eight times a year to set monetary policy. They examine data on the state of the economy at the time and review forecasts of future economic circumstances. The monetary policy, the Federal Reserve affects the nation's money supply and helps outline the direction of the economy. The Monetary policy has two basic goals: to promote "maximum" sustainable output and employment and to promote “stable" prices. In the long run, the amount of gods and services the economy produces (output) and the number of jobs it generates (employment) both depend on factors other than monetary policy. The Quantitative easing is an unusual monetary policy used by some central banks to stimulate their economy. They use this conventional monetary policy when the policy has not been effective. The central bank makes money to buy government bonds and other financial assets in order to rise money supply and the excess reserves of the banking system. Expansionary monetary policy involves a lowering of short-term interest by the central bank through the buying of short-term government bonds. When short-term interest rates are at or close to zero, normal monetary policy does not longer function as a purchase of short-term government bonds. This turn will motivate the economy as it inspires consumer and business spending and promote job growth. Quantitative easing may cause higher inflation and excessive money is created. An increase in money supply in excess has an inflationary effect. If production in an economy increases, the value of a unit of currency will increase more. The new money could be used by the banks to invest in new markets rather than to to lend to local business that are having trouble getting loans. Tax Policy: Tax has gone erratic as far as many people are worried. The income tax is determined by applying a tax rate, which may increase as income increases. Individuals and corporations are directly taxable. Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in a determination to control the economy. The government also realizes the overall pace of economic activity, looking to maintain high levels of employment and stable prices. It has two main tools for reaching these objectives: fiscal policy, through which it determines the appropriate level of taxes and spending; and monetary policy, through which it Francis E. Crespo-Gonzalez ECON*5F70*010 April 6, 2011 Macro Paper manages the supply of money. Economics proposes that increasing spending and decreasing tax rates are the best ways to stimulate aggregate demand. This tactic can be used in periods of recession or low economic activity as a critical tool for constructing the framework for strong economic growth and working on the way to full employment. Since Aggregate Demand can be affected by consumers, When Aggregate Supply curve shifts left because cost increases we see higher prices and greater unemployment. Tax cuts are designed to shift the Aggregate Demand curve when fiscal policy is proposed. President Obama has approved a two year extension to all the Bush-era tax cuts. This means that all 2010 Federal tax rates will be the same as 2011 rates, but many of this tax cuts enacted by President Bush in 2001 and 2003 are set to expire in 2010. These cuts were designed to help all income levels: America's low-, middle-, and higher-income workers.This tax bracket ranges and standard deductions levels increased because of low inflation. Budget Policy: As of March 25, 2011, the Total Public Debt Outstanding of the United States of America is $14.21 trillion and 97%of calendar year 2010's annual Gross Domestic Product of $14.66 trillion. This projected deficits or surpluses will change as the government changes its fiscal policy. The federal government is printing more money every time and Congress is raising the debt ceiling. Sooner or later, we will have to pay for this. Eventually, the U.S. economy will crash and we will have to create much more to earn less money. Nations that are making more and whose economies are “free” from public debt and government interference will ultimately grow. Trade Policy: Trade policy is a collection of rules and regulations which pertain to trade. Every nation has some form of trade policy in place, with public officials formulating the policy which they think would be most appropriate for their country. The purpose of trade policy is to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners. In many regions, groups of nations work together to create mutually beneficial trade policies. U.S. trade deficit in goods and services increased to $46.3 billion in January from $40.3 billion (revised) in December, as imports increased more than exports. . I think the deficit is expected to keep rising in 2011 even though U.S. manufacturers will be promoting from stronger overseas sales as the global economy recovers and a weaker dollar makes their products from economical in foreign markets. The export gains are expected to be outpaced by an even larger rebound in imports. Francis E. Crespo-Gonzalez Part II Forecast of 2011 GDP 2010 Q1 % Change (Annual Rate) Gross Domestic Product Personal Cons. Exp. Nonresidential Inv't Residential Investment Gov't Consump. Exp. 3.7% 1.9% 7.8% -12.3% -1.6% 1.7% 2.2% 17.2% 25.7% 3.9% 2.6% 2.4% 10.0% -27.3% 3.9% 3.1% 4.0% 7.7% 33.0% -1.8% Q2 Q3 Q4 Q1 ECON*5F70*010 April 6, 2011 Macro Paper 2011 Q2 Q3 Q4 2009 FULL YEAR 2010 FULL YEAR 2011 FULL YEAR 3.0% 2.4% 15.7% -8.2% 2.1% 2.7% 2.6% 11.4% 6.1% -1.8% 3.1% 1.8% 9.8% 23.6% 4.1% 2.5% 2.3% 7.5% -17.9% -2.7% -2.6 -1.2 -17.1 -22.9 1.6 2.9% 1.7% 5.7% -3.0% 1.0% 2.8% 2.3% 11.1% 3.6% 1.7% Absolute (2005) dollars Gross Domestic Product Personal Cons. Exp. Nonresidential Inv't Residential Investment Government Spending Net Exports Ch. In Private Inventories 13138.8 9225.4 1302.6 330.7 2540.2 -338.4 44.1 13194.9 9275.7 1355.3 350.1 2564.9 -449 68.8 13278.5 9330.6 1388 323.3 2589.6 -505 121.4 13380.7 9422.9 1413.9 325.9 2578.8 -397.7 16.2 13481.1 9480.4 1414.9 326.9 2579.8 -272 42.6 13572.8 9542.0 1414.9 327.9 2580.8 -412 59.2 13678.7 9585.0 1416.0 329.0 2581.8 -454 101.5 13764.9 9640.6 1417.0 329.9 2582.8 -399 18.7 12880.6 9153.9 1290.8 342.7 2542.6 -363.0 -113.1 13248.2 9154.9 1365.0 333.0 2568.0 -422.5 62.7 13624.4 9562.0 1366.0 334.0 2569.0 -384.3 55.5 MONEY: M2 (Actual) M2 % change (y/y) 8507.3 1.9% 8564.9 1.1% 8661.5 1.2% 8783.5 1.3% 8575.7 1.0% 8623.1 1.1% 8467.3 0.97 8701.9 0.99 8432.1 7.9% 8629.3 1.4% 8592 1.0% Consumer Price Index CPI % change 217.6 1.3% 217.2 1.0% 218 1.0% 219.4 1.1% 216.5 1.2% 218.3 1.0% 214.7 0.8% 216 1.4% 214.5 -0.3% 218.1 1.1% 216.4 1.1% Francis E. Crespo-Gonzalez ECON*5F70*010 April 6, 2011 Macro Paper INTEREST RATES: 3-month Treasury yield 10-year Treasury yield 0.11 3.72 0.15 3.49 0.16 2.79 0.14 2.86 0.13 2.89 0.17 2.72 0.14 3.25 0.12 3.11 0.15 3.26 0.14 3.22 0.14 2.99 PRODUCTION: Housing Units (millions) Motor Vehicle Sales(mill.) 0.62 11.0 0.58 11.3 0.56 11.6 0.57 12.3 0.52 13 0.61 13.4 0.53 12.7 0.59 11.8 0.55 10.9 0.58 11.6 0.56 12.7 Assumptions: • • • • • • Real GDP: A 3.1% growth rate in 2010 in fourth quarter compared to a 2.8% increase in 2011 Continued high oil prices assumed in the baseline The increase in commodity prices is an indicator of sustained inflation, but we will see an improvement in the in the job market Money supply is not expanding at all; the only country that has seen a substantial growth is China. The Federal reserve will continue to hold interest rates stable and will continue buying government bonds Population growth and purchasing power are essential drivers of gain in the U.S. References: http://www.ehow.com/about_5290275_monetary-policy-work.html http://www.bls.gov/ http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm http://www.federalreserve.gov https://www.wellsfargo.com/com/research/economics http://www.progress.org/gtpolicy.htm http://www.bls.gov/