the increase the economic growth rate. The monetary policy, fiscal policy and trade policy are the important policies, which are used by the American government and Federal Reserve for the economic development of the government. These policies mainly focus on the economy and the financial market issues of the nation (Wessels, 2000). Following are the macro economic policies of the American government and Federal Reserve for the economic development of the nation:
Monetary Policy – The monetary policy can be defined as the regulatory policy in which the central bank of a nation controls over the supply of money for the realization of general economic goals. The monetary policy also emphasizes on the price stability, improvement in the structure of the monetary and financial institutions, economic growth, etc. It affects all the economic and financial decisions of the people as well as interest rate in the country. The monetary policy of the US also has a significant effect on the other countries as it is the largest economy in the world (U. S.
Monetary Policy: An Introduction, 2007). The monetary policy by the Federal Reserve was announced in the year 2006-2007 for the sustainable economic expansion and to decrease the inflation rate in the country. The monetary policy of the 2006 helped to increase the real wages, which caused an improvement in the employment and consumer spending. The target for the interest rate is increased for the year 2006 by the Federal Reserve because of the pressure of the inflation rate and economic growth. The main target for the year 2006 is to control the inflation rate and increase in the consumer spending in the country.
But the prices of the commodities were increasing continuously and it was causing an increase in the inflation rate. To face this problem, the committee decided to moderate the economic activities, which helped to limit the rise in the inflation rate. The following chart defines the fluctuation and change in the interest rate by the decision in monetary policy during the period of 2006-2007 – (Source: Monetary Policy and Economic Developments, 2007) The monetary policy for the year 2007-2008 by the American government and Federal Reserve also focused on the economic growth and the reduction in the inflation rate.
The economy of the America was hit by the recession in the financial markets. The interest rates were also increasing continuously. To face this problem, the government and Federal Reserve announced the monetary policy to decrease the interest rates and increase the money supply in the country. The Federal Reserve made a short term liquidity package to increase the liquidity in the market through the open market operations. This function of the government helped to decrease the interest rate of the treasury bills in the country. The American government and Federal Reserve made the policy to face the financial crisis in the country.
The monetary policy for the year 2008 was based on the optimal distribution of wealth (Cook, 2007). In the current environment, the government of America is facing the financial crisis and an increase in the inflation rate. Many financial institutions are facing the problem of liquidity. To face this problem, the main focus of the monetary policy of the Federal Reserve is to ensure the soundness of the financial institutions. The Federal Reserve imposed some ceiling on the mortgage rates and interest rates to protect the small savers. The interest rates were cut by a higher rate to face the financial crisis.
It helped to decrease the inflation rates as well as unemployment rate in the country. The monetary policy of Federal Reserve is significant to give response to downward revisions. Fiscal Policy – Fiscal policy is a tool to determine the public revenue and public expenditures in the country. The current economic fluctuations are increasing the importance of the fiscal policy in a country. The fiscal policy includes the budget, revenue sources, and spending of the government in a nation (Fiscal Policy, 2009). The taxation system is also an important part of the fiscal policy.
The fiscal policy also affects the various economic variables in the country such as income distribution, demand & supply level and resource allocation. The fiscal policy of the American government is continuously following a pattern of deficit budget in the country due to an increase in the public expenditures to face the current financial and economic position in the country. The unemployment rate has also been increasing for the last few years. The economy of the country is facing inflation in the price of commodities but deflation or the depression situation in the overall economy.
The government of United State is using the fiscal policy as a tool to face the deflation situation over the last three years. The tax cuts in the year 2006 were the reason for the slower growth of the nation. It was also causing a problem for the future expenditures and revenues due to decrease in the financial position of the government. The fiscal policy was causing an increase in the debt of the government. The fiscal policy for 2008-2009 is announced to support the economy of the United States. The main objective of this fiscal policy is to improve the rate of economic growth in the country.
This policy includes a reduction in the tax rates and increase in the public spending. These features of the fiscal policy have an immediate and effective impact on the growth. The combination of the monetary and fiscal policy by the American government and Federal Reserve is helpful to face the deflation in the economy of the country (Special Report, 2008). The amount for the public expenditure is increased from the last few years to increase the consumer spending and eliminate the situation of deflation. It also caused an increase in the budget differences because of the limited number of revenue sources and high public expenditures.
But at the same time, it will be helpful to fulfil the objectives of the government to increase the rate of economic growth. The consumer spending is also increasing continuously because of an increase in their real income. The increase in consumer spending directly increases both the investment level and the wages rate in the country. It will also cause an increase in GDP level of the country, which will directly enhance the growth rate of the country’s economy. Conclusion In this globalized world, the United States is facing tough competition from several nations and their cartels.
On the whole, the things are not all that dismal for the United States economy. The economy is basically firm if seen from the outlook of the GNP, GDP and National Income. Even now, people from other nations are encouraged to move to America for an improved living and income; although this number has decreased (American Economy Recent Trends). Despite of all these positive trends, the overall state of the US economy is not good and several improvements are required for bringing about an enhancement in its status.
Reference: American Economy Recent Trends, Viewed on April 2, 2009, <http://www. economywatch. com/us-economy. html> Cook, R C, 2007, US 2008 Presidential Election: Important Concepts about Monetary Policy and History, Viewed 02 April 2009 < http://www. marketoracle. co. uk/Article3160. html > Costa, P. N. 2009, March 31, WRAPUP 1-Record drop in home prices keeps US consumers glum, Thomson Reuters, Viewed on April 2, 2009, <http://uk. reuters. com/article/marketsNewsUS/idUKN3141618020090331>