Evaluate the Current State of the Economy Essay Example for Free

Evaluate the Current State of the Economy Essay confinement market conditions be important especially for the following categories, businesses, individuals, and governments. The nations compass market conditions be constantly monitored by statistical analysis, un vocation ramble being the primary metric. In April of 2014, the unemployment crop fell from 6.7% pct to 6.3% percent (Bureau of Labor Statistics. whitethorn 2014), which was the last-place rate since September of 2008. Since January the unemployment rate had been somewhat flat, save in April 2014 it dropped. However in April, the labor force additionally dropped by 806,000 (Bureau of Labor Statistics, may 2014) meaning the current ratio drop from 6. 7% to 6.3% comparatively remains approximately the same as the constant tr completion. In other words, because of the accrue in workforce, the drop in unemployment may be partially a result of the decrease in workforce.The consistent level of unemployment makes sole cisms on AD and AS draw in minor. When unemployment decreases, as it did in April, a correlation linking the drop in unemployment to an extendd request of goods and services sight be do. This amplificationd subscribe to requires the increaseivity of companies to increase to meet the supply deficit, creating more jobs for individuals. With a greater demand for goods and services, there is a greater need for people to produce them, therefore a decrease in unemployment.Additionally, the decrease in unemployment means household income pull up stakes improve, providing them with more disposable income. As noned above, because of the increase in demand (seen in the come down in the unemployment rate), a direct correlation can be made to an increase in supply, though delayed. The increase in supply increases the number of rude(a) employees as employers look to meet the demand for goods and services, shifting the AS cut top to the right as well.In most cases unemployment remain s constant, but in US, the game unemployment rate (compared to the past) can have a negative effect on the delivery. The steady unemployment rate can reduce the supply of labor in the economy, as unemployed people become discouraged and stop looking for for jobs. This would shift the conglomeration supply curve to the left. Also employers may use the threat of unemployment to racetrack stipend, exploiting their workers.ExpectationsThe great intangible detailor directly affecting the economy currently is peoples expectations for future tense stinting fruit. These economic expectations influence the economy greatly. If businesses and households are more optimistic about the future of the economy, they are more likely to buy large items and make new investments, increasing the aggregate demand. The AD can change in a variety of ways. Peoples expectations causes them to spend less or be forced to cut consumption, it causes the government to cut its spending, and it causes busi nesses to be more upper-case letter conscious when choosing what their investment in goods go forth be from other companies. As a gauge, many people look at the gross domestic product (GDP), the broadest measure of economic activity, which grew at a 0.1% annual pace in the first quarter of 2014 (U.S. Bureau of Economic Analysis, April 2014). This is slow growth compared to recent annual rates of 2% to 3% (U.S. Bureau of Economic Analysis, April 2014).Many think the slowdown was caused by the long winter felt throughout the country. These slow growth rates shift both the AD and AS curves to the left, as consumers and business feel the affect or peoples wait and see status in economy. Assuming this is all weather based, the economy should bounce as household moral improves with the warmer spring and summer weather. Consumer expectations are also reflected in their spending. Consumer spending rose 0.3 percent last month afterward a downwardly revised gain of 0.2 percent in Januar y (Mutikani, Lucia, March 2014), positive for now, but on a larger scale reports show the slowdown in real GDP growth is reflected in the downturn in exports.The exports of industrial supplies and materials as well as foods, feeds, and beverages even outd after increasing in the quaternate quarter of 2013. (U.S. Bureau of Economic Analysis, April 2014). Additionally, imports have also declined by 0.4 percent in April, after increasing 1.8 percent in the first quarter of 2014 (Bureau of Labor Statistics. April 2014). The April drop was the first monthly decrease since the index fell 0.9 percent in November 2013 (Bureau of Labor Statistics. April 2014). Import prices also fell 0.3 percent over the past 12 months and have not recorded a year-over-year advance since the index increased 0.9 percent from July 2012 to July 2013 (Bureau of Labor Statistics. April 2014).There drops in the US economy are felt in the household sector through the execution of instrument of monetary and physic al insurance which are used to combat economic declines which directly affect consumers expectation and spending habits.Consumer IncomeAs mentioned above, consumers are still buying things. Consumer spending continues to be a bright spot, growing at a 3% annual pace. (Mutikani, Lucia, March 2014). This occurred even though prices of goods and services bought by U.S. residents rose 1.4 percent in the first quarter, after rising 1.5 percent in the fourth quarter of 2013. Both energy prices and food prices turned up. Excluding food and energy, prices increased 1.4 percent in the first quarter after rising 1.8 percent in the fourth quarter (U.S. Bureau of Economic Analysis, April 2014). This illustrates the shift in AD tow the right. importee consumers are willing to put up higher prices at current production rates.The increase in consumables indicates consumers have more disposable income to spend on goods and services, and they are not choosing to save. Personal income and personal s aving statistic showing that personal income adjusted for inflation and taxes increased 1.9 percent in the first quarter, compared with 0.8 percent in the fourth quarter of 2013 (Mutikani, Lucia, March 2014). Incomes also rose 0.3 percent last month after rising by the same margin in January. Additionally, inflation has remained low. featurethese factors, consumer spending, price increases, low inflation, increased personal income, will inevitably be forecasted by business as powers to increase production. Increased production also increase supply, shifting AS to the right as business attempt to meet consumer demand.Interest RatesInterest rates in the United States are the lowest they have been in years. This indicates the policy and stance taken by the government for lending money. The government is trying to entice consumers to file for loans as well as encourage banks to lend and approve loans. With interest rates this low and consumer income increasing, one would expect consume rs to increase their buying of more significant items.The aggregate demand curve shows, at various price levels, the quantity of goods and services produced domestically that consumers, businesses, and governments are willing to purchase. The increase in demand for low interest loans would shift the AD curve as a shift to the right.Domestically, the Federal Reserve expected to remain in a wait-and-see mode, hoping to get a clearer picture of U.S.s future economic strength (Kurtz, Annalyn, April 2014). Moreover, the Federal Reserve has been buying bonds to stimulate the U.S. economy on and off since 2008, but the central bank is now gradually take that program to an end. The withdrawal process is expected to reduce bond purchases to around $45 billion a month (Kurtz, Annalyn, April 2014), and this process potentially will shift the nations monetary policy to focus more on interest rates rather than adjustments to the monetary base.These changes to the interest rates will impact capi tal goods decisions made by consumers and by businesses. Lower interest rates will lower the costs of major products, such as houses, and will increase business capital project spending because of the reduction in long-term investment costs. Such changes will move the aggregate demand curve will down and to the right. But, in the event of an interest rate hike, the higher real interest rateswill make capital goods relatively more expensive and cause the aggregate demand curve to shift up and to the left.RecommendationsAmericas recent financial crisis and the anticipated future economic outlook can be traced back to 2007 when the U.S. housing bubble burst. The bank failures created a dominos affect, creating an economic meltdown in all sectors of the US economy. Despite government attempts to help the situation, the economy has slowed and has slipped in and out of recession. As a result, the current government policies have not been effective, creating hesitations in consumer spendin g.Since 2008, the actions taken by the Federal Reserve have put the U.S.s economy in jeopardy. To stem the economic slide of the U.S. housing collapse, the Federal Reserve has printed off trillions of dollars and has increased government spending in the economy hoping the inflow of cash will jump start economic activity. But is has had an inverse affect. This dilution of the monetary base has diluted the value of the U.S. dollar (USD) domestically and inter fieldly and has caused bear upon of consumer spending in the loanable funds market.Consumer spending is a 69% of the US GDP (The World Bank, 2013). An increase in spending would stimulate additional demand for products. With an increase in demand, business would increase productivity resulting in an improved GDP and lower unemployment. Additionally, in 2014 one of the greatest uses of a consumers income is to pay health care costs. The Bureau of Economic Analysis noted that the increase in health care costs was driven primarily by the implementation of the Affordable Care Act. Removing the Affordable Health Care Act will improve consumer spending, as their disposable income percentage will increase.When the financial crisis began in 2008, the U.S. national debt stood approximately at $10 trillion. Based on the US Treasuries own figures, the national debt will reach be close to $20.0 trillion by the end of this decade (US exchequer Department Treasury Direct, 2014), greater than our nations GDP. Reducing governmentdebt takes a long time, especially with the current international influences (China, Japan, EU). A fiscal policy to increased taxes and reduced government spending would be a place to start. Additionally, a reduction in monetary base will again, strengthen the USD internationally, helping facilitate and increase import/exports. Part 2 Evaluation of RecommendationsKeynesian PerspectiveBased upon the thorough analysis completed above, the Keynesian model is an appropriate mechanism for stimulating an economy that is growing but at a much slower rate than what is typical during a design of economic expansion. After a couple of years of substantive growth, the be for the first quarter of 2014 showed a GDP increase of just 0.1%. While the unemployment numbers continue to show a decline. While stubbornly remaining at 6.7% nationally through April, the most recent numbers show significant decline to 6.3%. The mortgage interest rates fell recently to 4.29% as the housing market has slowed down recently.While the Fed is beginning to slow down buying treasury bonds, it will continue to keep interest rates low until all signs point to GDP growth returning to a normal rate of 3.28% annually. Those numbers are indicative of annual GDP growth rates from 1948 to 2009. The first quarter of 2009 saw the economy shrink by nearly 5% following the market collapse and the bank bailouts just before President Obama took office. Subsequently, the bailout of GM and Chrysler in 2009 also impacted the economy as well, but was demand to save the industry and jobs in Detroit and elsewhere for parts manufacturers and suppliers. The risk of course was the termination of more than a million jobs, but in the end the loss was $10.5 billion in taxpayer money not repaid by GM.Classical Macroeconomic opening assumes that market conditions will sort themselves out, but the confluence of catastrophic economic issues such as the real estate market collapse, bank insolvency, the stock market collapse and the auto industry bailouts meant looking at long-term solutions wouldnot provide the confidence in the markets and consumers alike. Short-term or stop gap measures require to stem the downward spiral to depression and economic contraction were and are required to right the economic ship. Keynesian economic theory is more prone to acceptance of government stimulus as it relied on government spending during economic downturns.They Keynesians believe that the economy is made up of consum er spending, business investment and government spending and because of this, Fed monetary policy adjustments should be made to march on banks to make loans, businesses to invest in growth and expansion and consumers to have more buying power due to lower interest rates. When consumer spending is lessen, the Keynesian theory believes that the government spending can help with economic growth.The current course of action taken by the Fed and the President should be continued for the foreseeable future until economic conditions stabilize back to the norms over the last 60-plus years. Once GDP growth returns to expansionist highs and inflation begins to rise, there may be a need to take corrective action again to slow the economy down, but for now that is not an issue.Since economic growth is lacking, government intervention is needed to help regulate and jumpstart the economy. This will allow banks to lend more, businesses to invest more and households to spend more. It is crucial f or these three entities to do as such since it will help the economy grow and progress.Classical PerspectiveA portion of the AS curve that is almost vertical is associated with a real GDP rate that fully employs a nations resources. At a rate of output, the nation has reached the limitation of its short run capacity, so an attempt to increase employment or output beyond this rat would result only in a higher aver price level. The theory is built on the fact that in the long run, a nations move gradually and automatically moves toward full employment. This inexorable like movement toward full employment is theresult of supply and demand forces that cause prices (wages, interest rates, and exchange rates) to adjust so that markets clear. And after enough time, the market will settle the supply and demand in all markets, and thereby eliminate any imbalances, such as employment. Since many classical economists do not believe that government spending gives power to the public sector and decreasing the private sector, they do not fully agree with too much government spending as it exploits a lot of economic resources.Example judge a nation had excessive unemployment. Classical economist would agree that a major cause of the unemployment was an average real wage rate that was above equilibrium. At this wage rate the amount of labor supplied exceeds the amount demanded, resulting in unemployment. The excessive supply of labor would put downward pressure on real wages. locomote real wages would then have two reinforcing affects that acted simultaneously to bring the labor market back into equilibrium. First, lower real wages would increase the inducing for businesses to hire workers second, they would reduce the number of individuals in the workforce. For instance, instead of looking for work, some individuals might stay in school or remain homemakers. If real wages fell the amount of labor supplied would equal the amount demanded and unemployment would be solved. ( Marthinsen, John E. (2007))The classical perspective emphasizes on the belief that government spending is detrimental to the economy and that the market itself is self-sufficient and can automatically adjust to increases and decrease of employment, consumer spending, business investment and so on. The current government policies have not been effective and when looking at it from this classical perspective, it might be necessary for the government to step back and let the mark equilibrate itself.ReferencesBureau of Labor Statistics. (April 2014), U.S. Import and merchandise Price IndexesRetrieved from http//www.bls.gov/news.release/ximpim.nr0.htmBureau of Labor Statistics. (May 2014), Labor Force Statistics from the Current Population Survey Retrieved from http//data.bls.gov/timeseries/LNS14000000Conerly, Bill (2014) Economic Forecast 2014-2015 Looking Better With Help From crude oil And Gas Retrieved from http//www.forbes.com/sites/billconerly/2014/01/22/economic-forecast-2014-20 15-looking-better-with-help-from-oil-and-gas/Congressional Budget Office, (February 2014). The Budget and Economic Outlook 2014 to 2024 Retrieved from http//www.cbo.gov/publication/45010Kurtz, Annalyn, (April 2014). U.S. Economy Slows to Stall-SpeedRetrieved from http//money.cnn.com/2014/04/30/investing/gdp-economyMarthinsen, John E. (2007) Managing in a ball-shaped Economy Demystifying International Macroeconomics. Mason, OH Thomas SouthwesternMutikani, Lucia (March 2014). U.S. consumers lift spending, but sentiment slips. Retrieved from http//www.reuters.com/article/2014/03/28/us-usa-economy-idUSBREA2R0UB20140328The World Bank. (2013). Household final consumption expenditure, etc. (% of GDP)Retrieved from http//data.worldbank.org/indicator/NE.CON.PETC.ZSU.S. Bureau of Economic Analysis, (April 2014). National Income and Product Accounts Gross Domestic Product First Quarter 2014 (advance estimate). Retrieved from https//www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm US T reasury Department Treasury Direct, (2014). Historical Debt Outstanding Annual 2000 2012 Retrieved from http//www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm