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?

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The current macroeconomic situation in the U.S. is fairly stable, but there are warning signs of a recession in the near future. This is not surprising because the nation has enjoyed almost a decade of uninterrupted growth, and that cannot continue indefinitely.

Inflation has not been much of a problem....

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The current macroeconomic situation in the U.S. is fairly stable, but there are warning signs of a recession in the near future. This is not surprising because the nation has enjoyed almost a decade of uninterrupted growth, and that cannot continue indefinitely.

Inflation has not been much of a problem. It has averaged only three percent over the last three years. In the past three years, unemployment has decreased from five percent to four percent. In these two key areas the economy has performed well in recent years.

One big problem is the trade war with China. This has had a negative impact on American farmers and other U.S. industries. It was also a reason for the declines on Wall Street in late 2018. This trade dispute may be resolved by the summer of 2019.

Another problem for the economy is the erratic leadership of President Donald Trump. His tax bill disproportionately benefited the affluent and corporate interests. It is also responsible for increasing the national debt. In short, it made the tax rates more regressive, and that does not help the economy.

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The current macroeconomic situation in the United States is rather mixed.  The United States has officially been in an expansion since June of 2009, which was the trough of the “Great Recession.”  However, the growth in this expansion has been relatively slow and relatively “jobless.”  Therefore, the US is in an expansion but is still somewhat worried about unemployment and is not particularly worried about inflation.  This means that it is likely that relatively loose monetary and fiscal policies are called for right now.

Usually, when a country is in an expansion, it needs to worry about inflation.  This is because aggregate demand is rising which can cause price levels to rise.  In such cases, tight monetary and fiscal policies are called for.  The government should raise interest rates and sell securities in open market operations.  It should raise taxes and/or reducing spending.

However, in our situation, the US should probably not engage in these types of policies.  The US economy’s expansion is not very rapid.  If the government uses tight economic policies to put the brakes on growth, it could plunge the economy back into recession.  Therefore, the US should probably engage in monetary and fiscal policies that are mildly expansive.  The US should continue with its quantitative easing and should probably not engage in fiscal austerity.

In short, the US economy is in an expansion but it is not so robust as to make us need to worry about inflation.

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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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