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CURRENT MACROECONOMICS SITUATION
It seems apparent that the current macroeconomics situation in the US is bit difficult in numerous ways. Situations relating to employment, inflation, monetary and fiscal policies have been detrimental to US citizens who have undergone a trembling economy for many years. When there is enlargement in monetary activity, then the affluence will be experienced by a larger number of fiscal entities, in addition to industries, firms, workers, owners of capital as well as others. When there is a fall in fiscal activity, then the segment of companies' encounters a decrease in production. Furthermore, the sectors of the financial system will experience a decrease in consumption. Accordingly, due to reduced production, the companies lay off certain employees or decrease their hours as well as their wages. These pessimistic trends have an effect on the decline of standard of living as well as excellence of life of inhabitants. Consequently, this augments the deficiency rate which positively represent the most complicated difficulty for each nation. Consequently, economists attempt to determine the causes of these affairs (stages) of trade cycles and formulate suggestions concerning what could be done by way of suitable economic policies to tone down such demoralizing phenomena of depression. Recession ought not to be observed as incident from which there is no way out, but as a very severe indicator that point out that the financial system is unhealthy and we ought to take dynamic measures to its quicker recuperation.
Some basic theories of Macro Economics
Keynesian theories aim at the role played by customer self-confidence in the time of recessions. When consumers start to sense a downward trend regarding the future they will accumulate more money and spend less money. This shows the way to a reduction in demand for goods as well as services. If the prices of commodities are sluggish to change, this will, sequentially, guide to a excess of production. Consequently, firms will start to discharge workers. So this brings higher rates of unemployment.
Theories of New classical economics focus on the role of technology. When there is a slump in efficiency, firms will be incapable of manufacturing as many commodities as they could previously. The decline in employee efficiency leads to downsizing workers, usually resulting in a recession. Economists comprehend that technology rarely decreases, instead the effect on firms indicate that power price increases as well as tax hikes are over and over again indistinguishable in terms of their effects on firms. [Ghadiri Asli, B 1990] These are basic Macro theories which would be explained further.
The Whole Circumstances : Basic Cause
Overflow of Credit
It is necessary to understand that also today's crisis was not something that appeared from one day to another, rather, that it has been the result of different deeds and errors that have been done over the past few years in capital markets in the United States and globally. It started that these credits were provided to almost everyone in the U.S (including those who receive the minimum wage) in order to purchase or build real estate.. During that period there was a huge real estate boom in the US making these credits more attractive. Due to this, the house was sold for a higher price which allowed for a higher return than the original credit.
In 1929, there was a presence of loans for stock-market operations, the low level of margin requirements and the sharp increase in stock prices. Investors were able to obtain more shares without expending any additional personal funds.
Aftereffects
Unemployment, Inflation & GDP
The rate of unemployment has gradually gone down in last three years. The estimate shows that it was 9.1% in January 2011 which has dropped down to 6.6% in January 2014. Surprisingly it was almost 10.5% in the later part of 2009. The anticipated unemployment rate would be around 4% with full employment. But in fact in last few years the US economy has seen a historic upset as far as unemployment is concerned. But, the unemployment rate is merely one part of the whole scenario of the US macro economy.[ Blanchard, O. Zobeiri, H 2009]
The rate of inflation is also one other major factor that has been in news from last few years. As price levels augment for goods and services, the US currency is now less powerful and buys less, resulting in a quantifiable inflationary rate. In December 2013 it was 1.5% which actually has plunged down from 1.6% in January 2011. Although this was a minor change, it was extremely satisfying during tough times. The highest recorded rate was in September 2011 at almost 3.9 %. [Blanchard, O. Zobeiri, H 2009]
In 2013, the Gross Domestic Product (GDP) of the US financial system has increased to 2.60% extra in 4th quarter of 2013 as compared to in 3rd quarter. [U.S. Bureau of Economic Analysis] This mainly replicated positive assistance from exports, PCE, as well as nonresidential fixed investment.
Causes that can reason a fall in aggregate demand: The Keynesian Macro Economic Approach in practical [Funa, L 2009]
• Superior interest rates which diminish borrowing as well as investment
• Diminishing real wages
• Falling customer self-confidence
• Credit crisis which source a turn down in bank lending plus consequently subordinate investment.
• A time of deflation. Falling prices time and again persuade people to holdup spending. Also deflation amplifies the real worth of debt causing debtors to be poorer.
Sudden rise of price would add to the cost of production. This also results in short run cumulative supply curve to move to the left. This supply side shock results lesser real GDP as well as elevated inflation. This is complicated to solve with financial policy, since we have both increase in price and lower production to attempt and resolve, and changing interest rates can't solely accomplish that.
The Macro Theory Has Practical Aspect : Insight
As per to Keynesian analysis, if there is a decrease in AD then there will be a drop in Real GDP as well. The consequence on Real GDP is dependent upon the AS curve slope. If the entire economy is near to full capacity poorer AD would only result in slight fall in Real GDP.
AD is composed of C+I+G+X-M. Consequently a decrease in any of these factors could result in recession. For instance, if the MPC augmented the rate of interest, this would result the expenditure of borrowing to augment and make saving better option. This will effect of decreasing consumer spending. AD will possibly also go down due to deflationary economic policy. For instance, a fall in AD might be caused by higher taxes and lesser government spending caused the fall in AD. [Ghadiri Asli, B 1990]
Such dropping down of AD the multiplier effect might amplify the preliminary plunge in AD. For instance, if there is a decrease in output, workers shall be laid off or unemployed. These employees would then spend less causing a derivative collapse in AD. This shall result in decrease in Real GDP at a larger scale.
Banks at the time of the crisis, investigated subprime mortgage loans, even if the loans could have not been made in the first place. This problem is at the heart of today's crisis. Furthermore, the free market, as well as the greed of many CEOs can be held responsible for the situation. Many subprime borrowers had to find out that their homes were worth less then their mortgages, due to the house price depreciation. [Funa, L 2009]
In effort to avoid the crisis, the US could have cancelled the debts or modified them and in contrast get the repayments through trade. The results would have been a stronger European economy with a lower demand for US capital. This would have in turn created a lower dependency on a stronger US economy. Also, since the economies are so intertwined, the US investment in Europe would have been healthier.
Behavioral economics Paradox of Thrift"
A key characteristic influential for the rate of financial development is the altitude of customer in addition to business self-confidence. If self-confidence was far above the ground then advanced interest rates might not decrease demand. On the other hand if such confidence is low, plus furthermore people fear they might be made without a job, then they will spend lesser, resulting in AD to fall (or raise at a slower speed). Consequently this shows that outlook of human factors in economy are extremely significant and it is probable for "people to converse themselves into a slump". In a recession people have lower self-confidence and consequently expend less. Keynes named it as "Paradox of Thrift"
A significant characteristic of the US financial system is worldwide trade; consequently the US shall be influenced by a global recession. For instance a slump in the EU would source a drop in demand for US overseas demand reducing the. Also a slump in other countries shall directly affect the economic assurance. If investors see the US in a downward spiral they are concerned and will expend lesser money. However a worldwide recession might not result in a recession in the US if household/domestic demand remains far above the ground.
Macro approach of Classical Economists
Classical economists consider that any descent in Real GDP will be provisional and will also increase when labor market changes to the fresh price level. Classical economists disagree that if there is a decrease in AD then there will be a drop in Real GDP as well. On the other hand with a lesser price level wage rates will go down and as a result the SRAS will move to the right side. The economy will go back to the base level at Yf, and cause the recession ceased. If wages were cut in reaction to redundancy workers would have less power off spending therefore AD would continue going down.
The Move Beyond.
The economy is on the road to recovery, but the process has been sluggish and the unemployment rate remains quite high. On the other hand, inflation has remained subdued, apart from short term variations coupled with fluctuations in prices of energy and other commodities.The existing descending trend for interest rates be supposed to in expanding the economy. Loans are tough to acquire however, and getting the interest rate down has diminutive affect if firms that require capital can't attain loans. In due course, something will have to give. Even though the Federal Open Market Committee (FOMC) is making use of "easy money" tools, very little is happening to get credit flowing again and alleviate employment. [Even, S. and Feldman, N 2009] Tax breaks for large wealthy businesses that provide inducement to generate employment and encourage undersized business expansion possibly will help US engine to move. The Federal Reserve has bought large quantities of longer-term Treasury securities. The government can take severe action on restricting outsourcing which may allow the employment for the localities to get better and thus resulting in more proceeds. The Federal Government may also seek to change the reserve requirement for the banks. This possibly will affect the large quantity supply in the market and consequently controlling the inflation and the crisis. To sustain continued progress toward utmost employment and price stability, the Federal Open Market Committee expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after economic recovery strengthens. These actions included
- reducing the level of short-term interest rates to near zero
- to reduce longer-term interest rates
Lower interest rates helped the households and businesses to provide funds, new spending and help support the prices of many other assets, such as stocks and houses.
Expansive fiscal policy
In terms of depression it is essential to enhance public expenditure so as to arouse the retention of jobs production, and create fresh jobs. Discretion fiscal policy is mostly sustained by Keynesian thought of economics. Application of economic measures shall be useful, i.e. state involvement through fiscal policy by means of a recession is essential. As per Keynesian, the state ought not to be unconcerned when market breakdown occurs, i.e. when the financial system is far from preferred stage of financial activity. The results of the coming out of a slump are big: a reduction of employment, decrease of production, increasing the poverty, reducing the life quality of inhabitants. All these depressing deviations in the financial system are sufficient motive for state during expansive fiscal policy (amplified government expenditure or tax slash) to lessen this circumstances and to alleviate the financial system.
Conclusion
The fluctuations in economic operations are called economic cycles. The significance of such economic cycle, particularly as the recession stage of the economic cycle is vital for many reasons. It influences real macroeconomic factors viz., employment, production,the rate of financial development, standard of living and quality of life. Fiscal and Monetary policy makers are keen in the motives that actually augment recession. They are also very aware of suitable economic policies that will be pointed out for reducing the downside effects plus the outcomes on the U.S. financial system resulting due to the recession. Within this essay theoretical approach is explained to economic cycles as well as recession at all levels. The affect of the recession on US economy plus on real macroeconomic variables is also discussed.