Question

Write a short essay about the current state of the economy in the United States. You can find the latest official unemployment and inflation figures on the Bureau of Labor Statistics website. You can use other relevant sources as well. You must cite at least one source of information. This assignment must be submitted as an MSWord attachment.

Include in your analysis the answers to the following questions:

What is the current unemployment rate?

What is the current rate of inflation?

Are we in an inflationary gap, recessionary gap, or right where we need to be? (Assume a 5^1/2% natural rate of unemployment)

What fiscal policy options would be appropriate for solving the current problem (if any)?

Explain which policy option(s) you would favor.

Answer 1

1.Current unemployment rate is 4.1 percent(BLS website)

2.Inflation -CPI is 2.2 percent.This is calculated for urban households only and is not seasonally adjusted.(BLS)

3.The U.S. economy is currently emerging from a period of considerable turmoil. A mix of factors, including low interest rates, widespread mortgage lending, excessive risk taking in the financial sector, high consumer indebtedness and lax government regulation, led to a major recession that began in 2008. The housing market and several major banks collapsed and the U.S. economy proceeded to contract until the third quarter of 2009 in what was the deepest and longest downturn since the Great Depression. The U.S. government intervened by using USD 700 billion to purchase troubled mortgage-related assets and propping up large floundering corporations in order to stabilize the financial system. It also introduced a stimulus package worth USD 831 billion to be spent across the following 10 years to boost the economy.

The economy has been recovering slowly yet unevenly since the depths of the recession in 2009. The economy has received further support through expansionary monetary policies. This includes not only holding interest rates at the lower bound, but also the unconventional practice of the government buying large amounts of financial assets to increase the money supply and hold down long term interest rates—a practice known as “quantitative easing”.

While the labor market has recovered significantly and employment has returned to pre-crisis levels, there is still widespread debate regarding the health of the U.S. economy. In addition, even though the worst effects of the recession are now fading, the economy still faces a variety of significant challenges going forward. Deteriorating infrastructure, wage stagnation, rising income inequality, elevated pension and medical costs, as well as large current account and government budget deficits, are all issues facing the US economy.

4.On the fiscal side, government stimulus spending and tax cuts prevented further deterioration of the economy.

he U.S. government tends to spend more money than it takes in, and thus has incurred fiscal deficits almost uninterruptedly during the past several decades. The only time when the government managed to balance a budget in recent history was between 1998 and 2001, when the strong economy resulted in higher-than-usual tax revenues. The fiscal deficit reached the highest point since 1945 in 2009 at 9.8% of GDP, but has improved progressively since then; the deficit dropped to 2.4% of GDP in 2015.

The largest portion of government spending is mandated by existing laws, with a large amount of funds allocated to entitlement programs such as Social Security and Medicaid. Mandatory spending represents nearly 60% of total government spending. The remainder is referred to as discretionary spending, and is determined by the annual federal budget. About half of the discretionary budget is spent on the military and defense, with the other half spent on government programs and public services.

Nearly 50% of tax obtained by the U.S. government comes from income taxes on individuals, with an additional 10% coming from income taxes on businesses and corporations. Another 35% of collections come from payroll and social security taxes. Excise taxes charged on goods such as liquor, tobacco and gasoline bring in a smaller amount, less than 5%. Tax revenues equaled about 18% of GDP on average between 1970 and 2010. Total tax revenues as a percentage of GDP were about 18% in 2015.

The stimulus package introduced by the Obama administration in 2009 included USD 288 billion in tax cuts and incentives. Less than two years later, Obama announced an extension to the tax cuts that had been introduced during the Bush administration at a cost of more than USD 400 billion over two years.