Question

In 2019, the united states is experiencing an unemployment rate that is below its natural ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: 1. In 2019, the United States is experiencing an unemployment rate that is below its natural rate... 1. In 2019, the United States is experiencing an unemployment rate that is below its natural rate of unemployment. That is, its labor force is more than fully employed. However, the country is suffering from a rising fiscal deficit, a rising government debt/GDP ratio, and an expanding current account deficit. In addition, after years of quantitative easing in the wake of the 2008-09 financial crisis and economic recession, the Federal Reserve must now roll back its quantitative easing and shrink its balance sheet. Suppose macroeconomic policymakers want to achieve all the following goals:

a) Lower employment to full-employment level to prevent overheating of the economy

b) Reduce the fiscal deficit and rein in the growth in government debt

c) Shrink the Central Bank’s balance sheet

d) Reduce current account deficit

e) Maintain a stable US dollar to prevent imported inflation

Would there be any monetary, fiscal, and trade policy combination that would allow the policymakers to achieve all these above-mentioned objectives simultaneously in the short-run? If your policy proposals are adopted, explain what will happen to America’s real GDP, real interest rate, and net capital outflow

Answer 1

Suppose macroeconomic policymakers want to achieve all the following goals:

a) Lower employment to full-employment level to prevent overheating of the economy

b) Reduce the fiscal deficit and rein in the growth in government debt

c) Shrink the Central Bank’s balance sheet

d) Reduce current account deficit

e) Maintain a stable US dollar to prevent imported inflation

While achieving government objectives there will always be conflicts in objectives. While achieving full employment, inflation happens. Similarly, reduced budget deficit will curtail spendings on development and growth rates may go down. Imports can be restricted by putting restrictions or import substitution but it leads to reciprocal sanctions by partners and also currency changes which again make it difficult to maintain deficit in control.

However, capacity increase through supply side policies is an ideal solution to this.

These policies are of two types- Market based and interventionist based.

In market based- labour market reforms, encouraging competition and creating a business friendly environment is involved. In Interventionist based policy focus is on creating human and physical capital. If this capital is supporting the policies implemented by govt and central bank then policy conflicts can be lowered and long run solid development can be achieved. However, it should be noted that supply side policies are long term ,need time and investments.

Hence if policymakers want to maintain short term employment at highest level and does not want to stress govt. budget then capacity building through supply side policy along with proper combination of monetary and fiscal policies is needed so that economy is kept busy without inflationary impacts.

However, this is possible in medium to long run.

In the short run, trade protection through tariff, quota. Export promotion through administrative ease and more trade blocs and favorable terms of trade to USA may help achieve all above objectives. USA can also intervene in currencu market and devalue it to gain in short term like China does.