What is the "current macroeconomic situation" in the U.S. (e.g. is the U.S. economy currently concerned about unemployment, inflation, recession, etc.)? What fiscal policies and monetary policies...

What is the "current macroeconomic situation" in the U.S. (e.g. is the U.S. economy currently concerned about unemployment, inflation, recession, etc.)? What fiscal policies and monetary policies would be appropriate at this time?

Asked on by fsekiteri

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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At this point, the United States’ economy is, as far as we know, in a recovery.  That means that the economy is expanding.  Usually, this would mean that the US government would be concerned about inflation.  However, this recovery has not been very strong and the government is not particularly worried about inflation at this point.  The US government is more worried about unemployment than about inflation, though there is some concern about inflation in the future.

What this means is that the most orthodox fiscal policy would be to (at least to some degree) lower taxes and increase government spending and that the most orthodox monetary policy would be to keep interest rates low and to keep buying government securities on the open market.  Conventional economic wisdom says that lowering taxes and increasing government spending will increase the amount of money people have in their pockets, thus increasing aggregate demand.  Conventional wisdom says that lower interest rates will make borrowing easier, thus allowing businesses to expand and aggregate supply to increase.  It says that when the Fed buys securities on the open market it injects money into the banking system, which also makes borrowing easier.  These would be the conventional policies to pursue, though the government should probably not be too aggressive about them because we are not in a recession and we do not want to overheat the economy.

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