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Your topic: Economics Assignment

Your topic's description: Part A Deliverable Length: 1,500 words Two important policy goals of the government and the Fed are to keep unemployment and inflation low while at the same time making sure that GDP is increasing an average of 3% per year. it is important to have the right mix of policies and that all the variables be timed perfectly. Part 1. Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year, suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. what is the first action you would take as the president as the chairman of the Fed? why? what would be your subsequent steps? make sure you include both the positive and negative effects of your action making sure you include the trade-offs or opportunity costs. Include the following concepts in your discussion: demand and supply of money income and productivity interest rates Okun's law The Phillips curve Taxation Government spending Wages Aggregate supply Aggregate demand Long run and short run costs of inflation The multiplier and the tax multiplier An open vs. a closed economy The idea of Tax rebates to stimulate the economy Part 2: Assume the country is in a budget deficit and carrying a very large debt. discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this change any policy changes you discussed in part 1? Part B Deliverable length 1,500 The financial crisis of 2008 has caused macroeconomists to rethink monetary and fiscal policies. Economists, financial experts, and government policy makers are victims of what former Fed chairman Alan Greenspan called a "once in a century credit tsunami" in other words, nobody saw it coming. because you are now the expert in macroeconomics, your friends keep asking you your thoughts on what caused the financial crisis and whether the United States is going in the right or wrong direction with its current polices. Focus specifically on the following: Monetary policy what monetary policies do you think caused the crisis? what were the effects of the policies implemented in reaction to the crisis? do you think the solutions worked in the short term? in the long term? Fiscal Policies what fiscal policies do you thing caused the crisis? what were the effects of the fiscal policies implemented in reaction to the crisis? do you think solutions worked in the short term? in the long term? Make sure you include the following concepts in your analysis: interest reates GSAs The financial services industries (CDOs, CMOs, the stock market, credit flows, money markets, etc.) Tax rebates aggregate demand Stimulus TARP Government debt and deficit inflation unemployment GDP Globalization Foreign investment In you opinion, did government intervention help or harm the economy before and after the panic of 2008? would you have done anything differently?

Your desired style of citation: Harvard Referencing

Your educational level: Graduate

Paper Style: Research Paper

Number of page: 12

Word Count: 3000

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Economics Assignment

[Writer Name]

[Institute Name]

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Economics Assignment

Part A

Important Policy Goals of the Government and the Fed Are To Keep Unemployment and

Inflation Low

To survive and perform within a financial structure which presents individuals even

prices, stable jobs and a developing position of living is a wish of most people, with the main

macroeconomic aims of the UK government. The government attempts to keep unemployment

and inflation to a minimum; in the same time, it attempts to obtain fast financial development

with lasting symmetry in the balance of payments (Sexton, 2007). These aims are attracted

concentration since they are not likely to be obtained in their totality. Contrasted to earlier

performance, inflation of UK has been low and strangely even since the inception of inflation

aiming, whereas GDP growth also has been considerably even. It is confirm that some strategies

are there to present these participations to the economic performance of UK. In this research, the

major macroeconomic aims of the UK government will be described, with the strategies for

obtaining them. Lastly, the efficiency of strategies will be demonstrated (Russell & Heathfield,

2009).

The connection between inflation and unemployment has long been the focus of

macroeconomics. The Phillips Curve, identified from Alban W. Phillips, a famous economist

who defined an inverse connection between unemployment and wage inflation (Sexton, 2007).

The Phillips Curve has been an important task in the development of the financial policy. It

defines important relations between inflation and unemployment. The Phillips Curve in the

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1960‟s proposed that enduring low levels of inflation would permit enduringly lower joblessness

(Boyes & Melvin, 2010).

In the 1970‟s when the style of inflation rose, the public anticipated higher inflation to

keep and the Phillips Curve moved out. As the Phillips Curve was shifting in a northeasterly

direction presented any standard of joblessness was connected to higher standard of inflation

(Boyes & Melvin, 2010). Meaning if the Phillips Curve is in fact shifting then the connection

between unemployment and inflation is actually a harmful one. So, policymakers undervalued

the situation they could impact the development of hopes and decrease the cost of disinflation.

The Federal Reserve reacted through raising genuine interest rates higher than

compulsory. Unnecessary to define the Phillips Curve was modified. The modification connected

defining price setting parts that make choice of a company of the price of the price of its services

or good an important view that depends on hope of coming inflation (Baumol & Blinder, 2011).

In this example, present inflation depends on real financial variable for model production cost.

However, Phillip Curve derived from setting of price and became the source for policy

assessment. Financial policy has become more unrestricted and price stabilization appears to be

it main aim. Policy makers struggle for both low inflation and low unemployment.

A low inflation policy, if implicated, anticipates inflation is reduced and low nominal

wages increase as agreed. Once concluded, it is tempting for monetary policy makers to let

inflation increase because real wages are reduced and employment raises. This policy is basically

a temporary fix to the problem and not intended for the long haul (Russell & Heathfield, 2009).

The economy never seems to balance high inflation without reaching lower unemployment. The

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tradeoff between unemployment and inflation first reported in the late 1950‟s is simply that as

joblessness falls staffs are authorized to push for higher salaries.

Different companies attempt to approve the higher salary cost to the customer ensuing in

higher prices and inflation constructs in the financial system. This trade off simply permits

policy makers to focus low rates of inflation or low joblessness, but not both (Boyes & Melvin,

2010). Despite of selecting between higher unemployment and higher inflation, policy makers

were supported to concentrate on assuring that the financial system still at its real rate. The task

was to correctly anticipate its position and to steer the financial system towards development

rates that presented stability of price no concern what the standard of joblessness.

The long time of low interest rates and even prices appear to be ending. The cost of

Operation Desert Storm or Iraq War, growing oil and food prices, and different foreclosures of

adjustable rates mortgages has actually fueled the resurge of inflation. The near unemployed

recovery from the last depression proposed that the natural rate of joblessness will grow again. In

conclusion, we are headed for another recession (Baumol & Blinder, 2011).

In the early 1990s, a framework for monetary policy known as inflation targeting began

to gain popularity among industrialized nations. Prior to inflation targeting, these countries used

different monetary policy frameworks such as nominal money growth targeting and exchange

rate targeting (Boyes & Melvin, 2010). Under the assumption that one of the primary goals of

monetary policy is to maintain low and stable inflation, these policies failed to consistently

achieve this goal among countries that practiced them. Attempting to remedy this inconsistency,

central bankers began to practice inflation targeting, which differs from its predecessors in that it

directly targets the rate of inflation a central bank is trying to achieve.

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Based on developments in macroeconomic theory, there are a number of reasons inflation

targeting can be viewed as an optimal monetary policy framework. As was briefly mentioned

earlier, inflation targeting is practiced under the assumption that low and stable inflation

maximizes economic growth in the long-run (Baumol & Blinder, 2011). This assumption is held

as a general consensus by macroeconomic theorists, and is empirically supported by a number of

articles, particularly those by Stanley Fischer and Martin Feldstein.4 Therefore, under this

assumption, inflation targeting disregards minor short-run macroeconomic fluctuations in

variables, such as output and unemployment, in order to maintain medium-run inflation targets

thereby increasing long-run economic growth.

Another reason for disregarding short-run macroeconomic fluctuations is not that they are

unimportant, but that there is a lack of confidence among economists in monetary policy‟s ability

to impact the short-run. Particularly, three theoretical developments that discredit activist

monetary policy are Friedman‟s monetarist (Boyes & Melvin, 2010).

Critique that monetary policy works with “long and variable lags”, the breakdown of the

Phillips curve in the long-run, and the increased importance of credibility in determining

monetary policy‟s effectiveness (Baumol & Blinder, 2011). Therefore, because the time horizons

of inflation targeting aim to be set in the medium-run, and because the act of setting an inflation

target is an attempt to establish greater credibility, inflation targeting incorporates these critiques

within its framework.

Despite the fact that they tend to be, respectively, neoclassical and Keynesian in

orientation, real business cycle macroeconomic models and monopolistic macroeconomic

models nevertheless have at least one important feature in common: neither class of model, at

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least in principle, permits the possibility of involuntary unemployment. To explain this similarity

within the context of each model, I described the assumptions made within each model regarding

the supply of labor (Russell & Heathfield, 2009).

First, in real business cycle macroeconomic models, the supply of labor is variable. Given

this assumption that any fluctuations in unemployment reflect changes in the willingness of

people to work, it follows that the economy is, at any point in time, upon its labor supply curve

(Baumol & Blinder, 2011). That is, anyone who wants a job at the current wage is able to find

one. Therefore, there is no unemployment. Any fluctuations in employment are due to the

intertemporal substitutions of labor that are being made by workers as their incentives to work

fluctuate.

Having defined the natural rate of unemployment, discussed its relevance, and explained

how the natural rate relates to both real business cycle models and monopolistic macroeconomic

models, I now turn to a discussion of the factors thought to determine the natural rate. In this

section, I present reasons–both traditional and contemporary–for the phenomenon of

unemployment (Boyes & Melvin, 2010). Of course, frictional unemployment is widely

recognized as a key component of unemployment included in the natural rate of unemployment.

Frictional unemployment arises due to the time that it takes to match employers and job seekers.

While some frictional unemployment is thought to be inevitable, a degree of controversy

has emerged surrounding the impact that government policies may have upon search time. Along

these lines, Holmlund and Lundborg (1989) have analyzed whether unemployment insurance

schemes may be designed in order to exert a favorable effect upon unemployment (Russell &

Heathfield, 2009). Using a scheme wherein monopoly unions themselves fund unemployment

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insurance for their membership, Holmlund and Lundborg demonstrate that the natural rate of

unemployment may indeed be reduced. Therefore, government microeconomic policies can have

an impact upon the natural rate.

The other makes use of Okun‟s law only implicitly, estimating a production function and

then calculating potential output as the output level achieved when all factors are at their

predetermined “„normal‟ or „natural‟ levels”; Adams, Fenton, and Larsen (1987), Masson et. al.

(1988), and Torres and Martin (1989) incorporate this approach. Much like the important step of

deciding upon a “normal” level of output in the structural approach, deciding upon “normal”

levels of factors is an equally important step here. In one case, Perloff and Wachter (1979) use

such a production function approach and define the natural rate as the unemployment rate at

which the quantity of labor employed yields increasing, instead of constant, marginal output

costs (Boyes & Melvin, 2010).

Despite such controversy, the natural rate concept continues to remain with us. Therefore,

until such a time as the concept of a natural rate of unemployment is altogether forsaken by a

majority of economists, accurate estimates of the natural rate appear critical to the conduct of

policy that is aimed at avoiding the consequences of accelerating inflation associated with

unemployment that falls below the natural rate (Baumol & Blinder, 2011). Armed with some

relatively good estimate of what the natural rate is, we can, quite possibly, avoid falling below it.

Without such an estimate, however, we will know where the natural rate lies only once we have

fallen below it and are forced to face the pesky demon of accelerating inflation.

Part B

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The Financial Crisis of 2008 Has Caused Macroeconomists to Rethink Monetary and Fiscal

Policies

A monetary disaster is described as that stage, where the monetary system declines and it

impacts tasks like asset pricing, savings, interest rates, investment positions, capital markets,

money markets and the complete scenario of business. The monetary turmoil that began in late

2007 or early 2008 was caused because of to weaken lending standard and enhanced influence

which guide to important losses to particular organizations and conversely global imbalance

mean imbalance in investment and savings in world important financial systems (Halm-Addo,

2010).

Even though the major reason of monetary crisis is the global imbalance but the phases

performed are only focused towards decreasing the affect of the disaster and present a motivation

to the private debt-ridden businesses. The motivation has been presented in the style of bailout

packages for various industries of public sector, so these motivations presented through the

government demonstrates that there has been a shift in debits from private sectors businesses to

public sector (Peters, 2010). US taking benefit of its ruling status as the main issuer of reserve

assets to support its enhancing deficits and conversely, others rising countries opposed upward

stress on their currencies and had vast amounts of business surpluses causing a man-made global

inequity.

Deficits of public sector have enhanced manifold because of their enhanced risk exposure

and decreasing quality of assets supporting the debts which has guide to vast number of

delinquencies which in turn has support to great losses to the public sector businesses (Friedman

& Posner, 2010). This improvement in public shortfall has support to shift in concentration from

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controlling private arrears towards controlling and managing the public sector shortfall. The

government has attempted to decrease the gap between their revenues and spending so as to

decreasing their individual public arrears.

Affects of Global Crises

Public arrears are described as the variation between the present monetary government

spending and total of all present earning from various styles of taxes. Over the years there has

been a increase in public deficit and percentage increase in such deficit has outnumbered the

percentage increase in current revenue of the government (Russo et al, 2009). Some of measures

that may be taken in reducing these deficits are:

* Changes in tax rates ;

* Tax enforcement policies ;

* Reducing public spending ;

* Others government policy decisions ;

* Investment in profitable channels by the government ;

* Reduce the income tax exemption base limits ;

* Reduce the pork barrel spending ;

* Modify entitlement programs to reflect modern factors ;

* Pay attention to waste ;

The measures mentioned above are non exhaustive and these measures may be used in

isolation i.e. one at a time or in combination of one another in reducing the public deficit.

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Global imbalance means imbalance in savings and investment in world major Economies.

Such an imbalance between different major world‟s economies leads to a major global financial

crisis that started off three years ago (Friedman & Posner, 2010). The main reason of global

imbalance were differences in incentives provided by many investment zones in this world

which lead to an erratic flow of foreign currencies on a non-bilateral basis and caused currency

mismatch and diversion of funds.

The growth of these imbalances was facilitated by fault in the basic features of

international financial system and inefficiency of world leaders in assessing and correcting those

faults at the right time (Russo et al, 2009).

Due to reasons of global recession, there has been devaluation of all the major financially

strong currencies in the world and the Pound sterling is no exception to it. Over the period the

Pound Sterling has weakened with respect to currencies of other developing countries. Such a

phenomenon has lead to widespread discussion whether UK should join the Euro zone or not. As

the impact of global recession deepened, the EU formally has made an invitation to the UK to

join the Euro zone (Halm-Addo, 2010). The UK joining the euro zone would lead to dual benefit

accruing to the European Union as well as the UK. Such a merger will help to increase the

dominance of the Euro in the world market and will help UK to stabilize the currency relate

issues and take several decisions to cater the problems relating to global recession without

considering its impact on its currency as it will become part of a much larger economy.

A huge fall in financial asset was observed throughout the period of monetary disasters.

The worldwide monetary asset declines by $ 16 trillion in the year 2008. It also observed a vast

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fall in equity as an asset class as the capital markets across the globe saw a huge fall (Peters,

2010).

The financial crises which originated with the subprime crises and led to the fall

bankruptcy of many well respected banks also exposed the error in the reporting and accounting

standard which were not succeed to read and inform to the users of accounting data about the

future realities which stood so much so that the survival of the companies came into a severe

question (Halm-Addo, 2010). This guided to the world feeling the shortage in the accounting

method. The world was also fast to recognize the value of business governance and its

responsibility to combat concerns revealed through these global monetary disasters.

Constant efforts are required to stop this financial crisis from reoccurrence, because in the

absence of such efforts the imbalances will build up again and over the period they will become

major contributing factors for the next global financial crisis. Thus such financial reforms are

required to remove the intermediation in saving (Friedman & Posner, 2010). Some other

responses in reducing the global imbalance are lifting the cap on interest rates which will help in

increasing competition in the banking sector and provide incentives for banks to expand the

credit base. The combined effort has helped in reducing the global imbalance and also in

providing a sound financial market to cater the needs of every major economy and stabilize the

activities taking place in the financial market.

Some other responses in reducing the global imbalance are lifting the cap on interest rates

which will help in increasing competition in the banking sector and provide incentives for banks

to expand the credit base (Halm-Addo, 2010). The combined effort has helped in reducing the

global imbalance and also in providing a sound financial market to cater the needs of every

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major economy and stabilize the activities taking place in the financial market. Some other

reforms that is required to the cater the needs of current financial markets are to improve the

consistency of economic reforms at the global level, to support the management of monetary and

financial issues, design a network of regional and sub regional organizations, incorporation into

international lending, of internationally sanctioned standstill provisions (Russo et al, 2009).

It is also to be noted that the Fed had acted in a timely manner and introduced various

bailout packages. Reduced interest rates and reduced tax rates were a part of the bailout packages

introduced by the Fed (Halm-Addo, 2010). The fed was active in reducing both the direct as well

as indirect form of taxes. The Fed was successful in its action as it led to recovery of the

economy, but the steps had taken a toll on the reserves of the government.

As we may be aware, that the emerging markets were also hugely hit by the across the

board fall in the global markets. Moreover the trade in the emerging markets also took a hit as

the purchasing power of the first world companies had declined and the export of the emerging

markets took a hit (Friedman & Posner, 2010). The institutions around the world realized that the

world will be required to strike the right balance before we could come out of the ill effects of

the global financial crises.

The systematic nature of the financial crises was studied in real depth and immediate

steps were taken to ensure that such a practice was brought about to immediate stop so as to

ensure that such events don‟t crop up in the future. The Fed also supported a few lending

institutions by inducting money either through a buy out or a bailout (Halm-Addo, 2010).

Various lending banks and institutions contemplated merger so as to be able to fight out

the danger of being bankrupt, that might have been looming on them large. The possibility of

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merger was contemplated only if the merger could help in matching the asset and liability profile

and the combined entity has a lower cash out go and a lower liability as compared to the asset

(Khachatryan, Saito & Niculcea, 2011). The merger of Bank of America and Merrill Lynch was

one such example, where both the parties were in identical business, yet they agreed to go for

merger as it would be able to create certain assets which could help the combined entity as a

whole to meet their short term debts and obligation with greater ease and would go on to add

their chances of survival of the global financial crises.

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References

Abel (2007) Macroeconomics. Publisher. Pearson Education India. 215-224

Albert Halm-Addo (2010) The 2008 Financial Crisis: The Death of an Ideology. Publisher.

Dorrance Publishing. 15-24

Armine Khachatryan, Mika Saito, Ioana Niculcea (2011) Trade and Trade Finance in the 2008-

09 Financial Crisis. Publisher. International Monetary Fund. 34-41

Hubbard (2007) Macroeconomics. Publisher. Pearson Education India. 271-292

Jeffrey Friedman, Richard Posner (2010) What Caused the Financial Crisis. Publisher.

University of Pennsylvania Press. 193-208

Mark Russell, David F. Heathfield (2009) Inflation and UK monetary policy. Publisher.

Heinemann. 67-75

Mary Peters (2010) What the 2008/2009 World Economic Crisis Means for Global Agricultural

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Robert L. Sexton (2007) Exploring Economics. Publisher. Cengage Learning. 197-206

Thomas A Russo and Aaron J Katzel, Yhomas A. Russo, Aaron J. Katzel (2009) The 2008

Financial Crisis and its Aftermath. Publisher. Thomas Russo. 58-69

William Boyes, Michael Melvin (2010) Economics. Publisher. Cengage Learning. 118-129

William J. Baumol, Alan S. Blinder (2011) Economics: Principles and Policy. Publisher.

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William J. Baumol, Alan S. Blinder (2011) Macroeconomics: Principles and Policy. Publisher.

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