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You Decide

Essay by   •  May 6, 2012  •  Essay  •  398 Words (2 Pages)  •  1,333 Views

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Before getting to the words that you need I would like to point out a few mistakes in the statements mentioned above. It attributes a statement to Raymond Burke that the President should lower interest rates further to help business: the President does not control short-term interest rates, it depends on what the Fed wants to do. 

The US economy is coming out of the most severe recession since the Great Depression and the economy needs as much support as it can possibly get. This will involve both monetary and fiscal policies.

Investment in the economy has fallen by more than a quarter in the recession and an expansionary monetary policy that lowers interest rates will encourage firms to increase investment. It will also help increase consumption as people can borrow at lower interest rates. Given that the current target federal funds rate is close to zero, the options that are left in front of the Fed are more open market operations, and a more direct involvement in the financial market by providing lines of credit and short-term debt. 

The economy also needs direct stimulus from the government since monetary policy can only provide incentives to firms and households to spend, not actually increase spending. If the government decides to increase spending that will directly contribute towards increasing aggregate demand. Higher aggregate demand in turn will help increase our real GDP. Another reason why fiscal stimulus is more important today is that it has been shown that monetary policy is not as effective a tool in stimulating growth as fiscal policy is. 

The government should not raise the taxes in the short run since it will hurt the spending power of people, but should put forward a credible plan to raise taxes in the medium-to-long run to counter the deficit they are now running into. While in the short run it is important to raise real GDP using any possible means we should not loose track of the long run picture since anything that we are borrowing today has to be paid back at some date in the future. 

To summarize what we need right now is a policy that helps kick-start growth in aggregate demand and help pull the economy out of the recession. It is not something that can be done with one single policy and needs a multifaceted approach with every agency doing its bit.



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