The Fiscal and Monetary Policy and Economic Fluctuations

THE FISCAL AND MONETARY POLICY AND ECONOMIC FLUCTUATIONS 5

TheFiscal and Monetary Policy and Economic Fluctuations

In2014, the US economy performed better in the second and thirdquarter. This has been indicated by a GDP growth rate of 4.6% in thefirst quarter and a growth rate of 3.9% in the third quarter(Mitchell, 2014). In 2014, the US economy had a fast growingemployment rate. The unemployment rate declined in October. Thedecline in the unemployment rate resulted from an increase in thenumber of individuals that re-entered the work force. A vast numberof individuals had been laid off in 2013, but found new jobs in 2014,which led to a decrease in the number of unemployed individuals. Forinstance, in October alone, the number of individuals that found newjobs was more than 20,000. Comparing the unemployment rate for 2014and the past five years, the unemployment rate was the highest in2010. The unemployment rate has been declining since 2010 through2014. The interest rate for 2014 was 1.7%, which was an increase fromthe interest rate of 2013. Comparing the 2014 interest rate with theinterest rates for the past five years, the interest rate for 2011was the lowest since it stood at 1.3% however, it was the highest in2009 since it stood at 2.5%. On the other hand, the inflation ratefor 2014 stands at 1.7% this records an increase from the 2013inflation rate which stood at 1.5%. For the past five years, theinflation rates have been changing. The inflation rate was thehighest in 2011, where it stood at 3.0%, while the inflation rate wasthe least in 2010 and 2013, where it stood at 1.5%. The inflationrate was also high in 2009, where it stood at 2.7%.

Overthe past five years, the interest rates, unemployment rates, andinflation rates kept on changing. A reason that can account for thechanging interest rates is the slowing down of other world economies.As the economies such as euro-zone, China, and Japan slowdown,investments become deflected from these areas towards the US economy.This makes the interest rates change at a slower rate. Theunemployment rate changed over the past five years because there wasa change in the number of people that become employed and unemployed.On the other hand, the inflation rate changed over the past fiveyears as a result of the changing gasoline prices.

Onestrategy that can be used in stimulating consumer spending entailsthe government introducing a tax cut. A tax cut is likely tostimulate consumer spending because people will pay less taxes fromtheir incomes, which will imply that they will have more income forspending. This will make them spend more in purchasing commoditiesand services since an individual is likely to spend more, when he/shehas more income left after paying tax (Gupta,2004). Therefore, a tax cut will have an effect of making consumersto spend more resources in purchasing commodities and services.Another strategy that can be introduced in order to stimulateconsumer spending is lowering the level of interest rates. Throughlowering the level of interest rates, people are encouraged to borrowmore, a move that makes them spend more in purchasing commodities andservices in the economy.

Thesetwo strategies affect unemployment, inflation and interest rates.Through introducing a tax cut, individuals will be encouraged toestablish businesses because the taxes that they are likely to payhave decreased. As they start new business, the businesses provide asource of employment to various individuals. This reduces the rate ofunemployment. Besides, a tax cut will have an effect of lowering thelevel of inflation since it stimulates consumer spending. Asconsumers spend more resources, there is an increase in resourcesflowing in the economy. The flow of these resources in the economycan help in reducing inflation (Barro,2008). A tax cut will have an effect of lowering the interest ratesince people will demand less money in purchasing commodities andservices the decreased demand for money will lead to a decrease inthe level of interest rate.

Onthe other hand, the strategy of lowering the level of interest ratewill have an effect of lowering the level of unemployment rate. Lowinterest rates would encourage people to borrow more, which wouldhelp in getting resources for starting businesses. The new businessesestablished as a result of low borrowing cost would provide a sourceof employment, a move that would decrease unemployment rate (Gupta,2004). The low interest rates would also help in decreasing theinflation level. This is because as interest rates decrease, moreemployment opportunities become created and consumer spending becomesstimulated. The increase in the number of employment opportunitiesand enhanced consumer spending help in increasing resources flowingin the economy. The increased flow of resources can aid in easing thelevel of inflation (Gwartney,2009). Therefore the strategy of lowering the interest rates willhave an effect of lowering the inflation rate.

References

Barro,R. J. (2008).&nbspMacroeconomics:A modern approach.Mason: Thomson.

Gupta,G. S. (2004).&nbspMacroeconomics:Theory and applications.New Delhi: Tata McGraw-Hill.

Gwartney,J. D. (2009).&nbspEconomics:Private and public choice.Australia: South-Western Cengage Learning.

Mitchell,J. (2014). U.S. Economy Grew at 4.6% Rate in Second Quarter: The WallStreet Journal. Retrieved fromhttp://online.wsj.com/articles/u-s-economy-grew-at-4-6-rate-in-second-quarter-1411734858