Question

What changes do you see in today's economy as compared with the past. Have things like interest rate changes and tax cuts had a positive or negative effect on the economy? Are unemployment goals different? Will deficits create a burden on future generations? What do you think of our current economic growth (GDP)? Why is the relationship between national debt and GDP important?

Answer 1

Today’s economy, has come out of the recession and it is in the growth mode. It is shown by the unemployment level of approx. 4.1% and inflation rate over 2% in the economy. As a result, the first change is expected to be slow and gradual rise in the interest rates and it has already started by the Federal Reserve by increasing the Federal Fund rates. The next change will be the removal of the stimulus packages on a gradual basis. In the face of a growing economy and improved level of aggregate demand, there will be a decrease in incentives for the firms and money supply will also come down to control the inflation with in the target rate of 2%.
Initiatives like reduction in interest rates and tax cuts, have a positive effect on the economy as it has encouraged the spending. As a result, the aggregate demand level is increased and to cater this demand, firms started production activities. It created new employment opportunities. Unemployment level is 4.1% that marginally above the natural rate of unemployment. But, this level of employment, includes part time workers also that want to be full time. So, unemployment goal now is to help them employed in a full time Job. A deficit forces the government to take more debt. It causes the government to spend the money more on debt repayment and spend less on welfare schemes and other development projects. It will cause higher deductions to the salary or wage received by the coming generation. Thus, a deficit creates a burden for the coming generation. National debt is also expressed in terms of the percentage of the GDP and it reflects the debt repayment capabilities of the economy. So, the growth in GDP, should be faster than the growth in national debt to repay the debt quickly. Hence, it is important to understand the relationship between debt and GDP.