Question

Address and answer all of the following question, you should assume the Federal Reserve is going to raise interest rates in 2018

1.         Where is the US economy in the Business Cycle? (expansion? recession? early? late?)

2.         What is the current inflation rate? (Cite your source)

3.         What is the current U3 unemployment rate? (Cite your source)

4.         Should US fiscal policy be expansionary or contractionary at this time? Why?

5. What are your recommendations for real government spending (increase, decrease, or keep relatively unchanged)? Why?

6. What are your recommendations for taxes (increase, decrease, or keep relatively unchanged)? Why?

7. Are your tax and spending policies consistent with your policy recommendation in Question 4? Explain.

8. At a less macro level, name three specific categories of government spending (G) that you think should be changed, consistent with your recommendation in Question 4. Do not include transfer payments, only categories of government purchases of goods or services.

     a.     For each category of spending, explain whether the spending should be increased or decreased

     b.    Explain why each has been chosen.

9. At a less macro level, name a specific change in the tax policy and explain why it should be enacted to help accomplish the policy recommendation in Question 4.

Answer 1

1. Where is the US economy in the Business Cycle? (expansion? recession? early? late?)

The business cycle has the following four stages:

1. Expansion. The economy grows a healthy 2-3 percent. Stocks enter a bull market.

2. Peak. The economy grows more than 3 percent. Inflation sends prices up. There are asset bubbles. The stock market is in a state of "irrational exuberance." Talking heads announce we are in a "new normal." Authors publish books entitled "Dow 30,000."

3. Contraction. Economic growth slows but isn't negative. Stocks enter a bear market.

4. Trough. The economy contracts. That signals a recession. Economic experts predict it will continue for years.

5. As of June 2017, the economy is in the expansion phase. It has been since June 2009. That's eight years. Historically, expansion phases last five years or so.

6. It isn’t at peak because there hasn’t been inflation. That’s a typical warning sign that expansion is heading toward an end.

7. Instead of inflation, there are asset bubbles. The most recent has been in the U.S. dollar.

2. What is the current inflation rate? (Cite your source)

Inflation is a term used to describe a general rise in the price of goods and services in an economy over a given period of time. Inflation in the United States is calculated using the consumer price index (CPI). The consumer price index is a measure of change in the price level of a preselected market basket of consumer goods and services purchased by households. The current inflation rate is 2.38%.

Source: A government statistical site.

3. What is the current U3 unemployment rate? (Cite your source)

U3 is the official unemployment rate. U5 includes discouraged workers and all other marginally attached workers. U6 adds on those workers who are part-time purely for economic reasons. The current U6 unemployment rate as of January 2018 is 8.20.

Source: An economic trends site.

4. Should US fiscal policy be expansionary or contractionary at this time? Why?

US fiscal policy should be expansionary at this time. Expansionary fiscal policy expands the amount of money in an economy. It puts more money into consumers' hands to give them more purchasing power. It uses subsidies, transfers payments including welfare programs, and income tax cuts. It reduces unemployment by contracting public works or hiring new government workers. All these measures increase demand. That spurs consumer spending, which drives almost seventy percent of the economy. The other three components of gross domestic product are government spending, net exports, and business investment.

Corporate tax cuts put more money into businesses' hands. They use it for new investment and employees. In that way, tax cuts create jobs. But if the company already has enough cash, it may use the cut to buy back stocks or purchase new companies.