Best Approach to Stimulate the US Economy

Document Type:Thesis

Subject Area:Accounting

Document 1

The central bank and treasury are agent institution that the government used to implement its macroeconomic intervention in the economy. This analytical essay seeks to provide the best approach to stimulating the American economy for the Federal Reserve Fiscal policy is the government interventions through tools such as taxation, spending, and debt to influence and monitor the state of the economy. Monetary policies refer to the government macroeconomic activities in controlling the economy. As highlighted by Mishkin, Frederic, the monetary policies aimed at increasing or reducing interest rates, capital held by the banks as well in circulation in the economy (159). Monetary interventions include influencing interest rates, open market operation leading to buying or selling treasuries as well as availing discount window help the government to achieve desired economic growth by regulating money circulating in the economy (192).

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When issuing monetary policy the Federal Reserve usually has to balance the benefits and adverse effects of the policy. For instance, interest rest and unemployment Madura (125). Moreover, monetary policies have an impact on security portfolio and security markets. As highlighted on Madura monetary policies that weaken the dollar against world currency can stimulate the economy through increased exports (125). In turn, this makes it cheaper to import goods from America thus creating jobs opportunities to numerous households within the economy. Discount window lending is an effective monetary policy that provides short-term credit borrowing at discounted rates to increase liquidity in the economic countering effect of internal and external disruption that may cause inflation rate to increase. This is an effective monetary policy target overcoming short-term challenges that cause disruption in the economy.

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The reduced borrowing rates of the financial institution from the central bank induce Lower rate on credit offered to firms, business, and individual in the economy. Availing more funds stimulate economic growth and spending as well as attract investment due to the low-interest rates and cost of doing business in the economy. Furthermore, the market regulator needs to implement strong detector and highlight of the problem in the economy to help increase the response times of the Federal Reserve and other policymakers in the government. Moreover, a statement by the central bank that signal low-interest rate for an extended period of time or until certain condition such as unemployment is adequately addressed can help bring back the economy to healthy levels (Alesina, Alberto, and Francesco Giavazzi, 354).

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As highlighted by the Economist article, this token of promise technique has been extensively used by Bank of Japan and Bank of England to allow the financial market to self-guide with the belief that higher inflation in future can reduce the current purchasing power or borrowing abilities. Historical context of both policies Fiscal policy After the global crisis of 2008, the external investor lost faith in the American economy, withdrawal of foreign investor funds from the economy leads to stagnated growth such as that observed in Europe during the Euro crisis leading to overall stagnated and lower economic growth across Europe economies as compared to other nations in the emerging economies. The reduced foreign investment in the USA economies can lead to increased interest rates , the federal reserve interventions can help prevent rise of the interest rates.

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The Economic Stimulus Acts of 2008, as well as the American Recovery And Reinvestment Act of 2009 totally to a tune of over $1 trillion spread over the decade, were designed to stimulate the economy after the great 2008 recession (David and Eric Leeper 215). The bailout programs and extension of credit targeted critical institution such as AIG among other institution that has a significant impact on other sectors of the economy. This prevented expanding the impact of the global crisis on other sectors of the economy linked to the major institution affected by the 2008 global financial crisis. The recession that followed the American crisis led to the central bank slashing of the interest rates to almost zero in attempts to arrest the wealth loss and unemployment.

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The weak American economic growth rate triggered the federal reserves to buy long-term securities in efforts to bring down the cost of borrowing. The purchasing of the financial assets was critical in raising the level of government reserves. Conclusion Despite, the statutory mandate to maintain employment rates, the Federal Reserve has to keep in check the undesired effects of inflation and the needs for prices stability in the economy. Adoption short-term solution to trigger economic growth are essential in sustaining social harmony and stability in the economy but it is crucial to consider sustainable long-term government intervention that mandates stable employment rate and acceptable inflation rates within the economy. It is important to monetary and fiscal policies that target to reduce interest rates and the tendency to increase employment rates in the economy (Mishkin, Frederic, 494).

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