Macroeconomic Principles

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Macroeconomic Principles It has taken over a decade to remove the U.S. from the Great Recession. For several years after the Great Recession had ended, the U.S. has been growing at a historically slow rate. The paper analyzes the causes of the slow increases in the GDP of the U.S. In the analysis, there is a need to consider the federal monetary approach that was taken by the Federal Reserve on the path to recovery, the fiscal policy that was taken by the federal government, and the reasons why the unemployment rates rapidly dropped despite the low GDP increases among other issues.

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The federal monetary approach that was taken by the Federal Reserve As the regulator of banking institutions in the U.S., the Federal Reserve is supposed to perform two primary responsibilities: maintaining the stability of prices and assisting the economy in remaining near the maximum sustainable employment. The rate of unemployment rises when the economy contracts. The Federal Reserve has been responding to these changes by using open market operations. These operations entailed acquiring and selling securities to lower the funds rate of the federal. When the economic condition worsened as a result of the rest recession, a reduction in the federal fund rate led to a reduction in the interest rate in the economy, hence encouraging the businesses to employ more workers and invest and encouraging the consumers to spend more, thus lowering the rate of unemployment slowly (Heijdra, 2017).

After the Federal Reserve lowered the federal funds rate, there was a drop in the unemployment rate, although this also happened with a lag. With the slow improvement in the economic condition, the Federal funds escalated the federal funds rate again to forestall the inflation. This happens in a situation where the economy overheats, and the prices happen to rise rapidly.

Even after the great recession, the levels of unemployment were high. The Fed was obliged to keep the funds rate close to zero for some time while also pursuing the expansionary monetary policies tailored towards encouraging the country's economic activities. The Fed put its tools to use to such an extent that if a recession had to occur again while the funds rate remains near zero, it would not have its conventional tools considering it cannot be lowered any further (Heijdra, 2017). It will then be forced to use unconventional tools to help the economy recover.

After the financial market turmoil subsided, more attention was paid to the financial sector reforms and regulation and supervision. This was motivated by the desire to avoid such

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similar events in the long run. There were various measures that were proposed. For instance, there was a significant increase among the traditional banks, especially when it comes to the amount of the required capital; this was characterized by larger increases, especially for the systemically important institutions. The liquidity standards were to be imposed to limit the amount of the bank’s maturity transformation (Heijdra, 2017). Stress testing helped both the regulators and the banks understand the risk and compel the banks to use the earnings in building the capital as opposed to paying the dividends as the conditions deteriorate.

The fiscal policy approach the Federal Government took to the recovery.

The fiscal policy was utilized in stimulating the aggregate demand after the great recession. Actions such as tax cuts and government spending were used to boost the households' income and spending. The consumer sector was in a deleveraging mode, and there was a high saving propensity, which led to government debt creation as opposed to income.

The U.S. engaged more in the expansionary fiscal policies that increased the level of aggregate demand through a reduction in tax rates and increases in the level of government spending. The expansionary policy was tailored towards increasing consumption level by raising disposable income by reducing personal income taxes or payroll taxes. It also increased the level of investment spending by raising the after-tax profits through reductions in the business taxes, and an increase in the level of government purchases through the increased federal government spending on the goods and services, and raising the federal grants to local and state governments to increase the expenditure on the final goods and services (Heijdra, 2017).

To some extent, the contractionary fiscal policies could also be utilized in order to attain the reverse when there were instances where the fiscal policies were appropriate. This entailed

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decreasing the government spending that was achieved either through the cuts in the level of government spending or increases in the tax levels (Christiano, Eichenbaum & Trabandt, 2015).

During the 200-2009 great recession, the U.S. economy suffered a cumulative loss of 3.1% of the GDP. This is actually more than one year of the average growth rate of the GDP. During this time, the rate of unemployment doubled from 5% to 10%. The choice on whether to use the tax or spending tools had a political hinge, i.e., the republicans could prefer the expansionary fiscal policy by tax cuts while the democrats were for the implementation of the fiscal policies through government spending (Christiano, Eichenbaum & Trabandt, 2015).

In the U.S., there was a $152 billion stimulus tailored towards staving off the recession.

The bill that was to facilitate the implementation consisted of $600 tax rebates to the middle and low-income Americans. The U.S. put in place many stimulus measures through the America Recovery and Reinvestment Act of 2009, which entailed a $787 billion bill that covered various expenditures from the rebates on taxes to the business investments. There was $184.9 billion, which was supposed to be spent in 2009; $399.4 billion was to be spent in 2010. The remainder of the bill's appropriations was to be spread over the rest of the decade (Christiano, Eichenbaum & Trabandt, 2015). The announcements of the rescue plans were associated with good returns, while a pubic intervention in favor of specific banks yielded negative impacts.

How the attempts to influence GDP in the short-run negatively affect GDP in the long-run The long-run GDP growth can be referred to as the sustained rise in the number of goods and services that are produced in the economy. The GDP of a country can be tied closely to the growth of the population apart from the prices, supply, and demand. The long-run growth of an economy is characterized by the growth of productivity, demographic changes, and participation in the labor force. The growth of productivity refers to the ratio of the economic outputs to

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inputs, i.e., services, materials, energy, labor, and capital. The lower prices increase the demand, and this will subsequently lead to higher revenue. The demographic changes influence the employment to population ratio (Nakamura, Sergeyev & Steinsson, 2017). Important factors here include the quality and quantity of the available natural resources. As for labor force participation, important factors here include low birth rate and death rate, which is likely to lead to high labor force participation.

The GDP in the short run has direct implications of the GDP in the long run because the aggregate production, worker productivity, and the above factors will have a long-term effect on the GDP (Nakamura, Sergeyev & Steinsson, 2017). The long-run GDP growth of a country may change the scale of operations by adjusting the level of inputs that are fixed in the short run. The aggregate production functions consider the short-term inputs and outputs of an economy or a firm.

In the long run, worker productivity is directly influenced by fixed capital, and this includes useful machines, improvement of land, and building as the means of procuring revenue, among other aspects. One way of increasing worker productivity is to invest in better machinery, and such initiatives are normally done on a shorter basis. In the short run, firms can also find ways to increase the revenue of the product generated by the workers (Nakamura, Sergeyev & Steinsson, 2017). Considering that productivity is measured in the short-run, i.e., dollars per week, generating more revenue from the same output is likely to be reflected in an increase in the productivity of the workers, which also determines the GDP of a country in the long run.

The government activities such as investment, monetary policy, and fiscal policy impact the short term GDP and eventually affect the long term GPD. Investment stimulates the economy through education, production, infrastructure, and preventive healthcare, among other initiatives.

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When it comes to monetary policies, the government is likely to enact the policies to keep the growth rate of the money steady (Nakamura, Sergeyev & Steinsson, 2017). Thus, it can be used to regulate the excess short-term growth and inflation, both of which may negatively affect the growth in the long run. The fiscal policies affect the level of inflation in an economy.

Even though there are different ways in which the short-run fluctuations in demand can affect the short term and medium growth, there is also limited research. When the aggregate demand is rising, i.e., the purchases of services and goods at the current prices, it means that the economy is at its full capacity. In this kind of scenario, it is evident that factories are fully utilized, labor is fully employed, and stores are occupied, among other things. Going by the standard economic model, the ability of the GDP to expand is limited by the capacity of the economy. Capacity is normally determined by technological progress, the saving rates, and the size of the labor force. There is an assumption that these factors are not affected by the short-run changes in the aggregate demand. This implies that in standard economics, there is no relationship between the short-run policy and the long-run growth apart from the negative impacts of the budget deficits of the capital investments as a result of the crowding out private debt by public debt in the credit market (Nakamura, Sergeyev & Steinsson, 2017). However, there is also a counter-argument here that high levels of aggregate demand may also create conditions that are likely to expand the capacity by encouraging educational investment and capital investment, reducing production costs, and research and development.

In macroeconomics, long-run growth in GDP has to do with the increase in the market value of the goods and services produced by an economy over some time. The long-run growth is determined by a change in the gross domestic product (real GDP). For an economy to be able to experience positive long-run growth, its inputs and outputs must be in balance to ensure that

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an increase occurs in supply, revenue, demand, and employment. The short-term economic decisions, and by extension, the short-term GDP will determine the long-run economic growth (i.e., growth in the GDP) (Nakamura, Sergeyev & Steinsson, 2017).

Why the unemployment rate dropped rapidly in the United States despite low rates of increases in GDP In the years 2008 and 2009, the rate of unemployment rose, while the GDP contracted.

During this time, a lot of business failures occurred based on various reasons. As the recession spread, more businesses had to limit their activities or fail altogether, and this led to a mass layoff (Grijalva & Neumark, 2013). Even though the unemployment increased drastically during the great recession from 4.5 percent before to 10% in 2009, the U.S. managed to drastically bring it down as it stood at 5.8% by November 2014. The change can be attributed to the cyclical factors as opposed to the structural factors. It has been proved that employment would have been 4.55 lower had it not been for a government initiative to spend on Medicaid from the recovery act.

More so, there were targeted work opportunity tax credits that increased employment for the youth that had been disconnected by about 4.7 (Ghayad & Dickens, 2012). However, the credits did not work well for the unemployed and disabled veterans. This was attributed to the lack of take-up because the employers had tremendously increased the hiring of the veteran groups during this time. Some measures were targeted toward the long-term unemployed, and these measures seemed to have been very effective. For instance, a hire act increased employment by 2.6 percent for those who had been unemployed for more than two months. However, take-up was also low because of the complicated rules put in place for the people to qualify for the hiring credit.

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Nevertheless, Reemployment and Eligibility Assessments that was put in place in 2012 as part of the extension of unemployment benefits appeared to have even immense impacts on those unemployed for more than six months (Ghayad & Dickens, 2012). Various measures contributed to the reduction of unemployment to boost the labor demand and help those who were unemployed for a long go back to work. This made it possible for the unemployment rate to drop rapidly in the United States despite low rates of increases in GDP.

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References Christiano, L. J., Eichenbaum, M. S., & Trabandt, M. (2015). Understanding the great recession.

American Economic Journal: Macroeconomics, 7(1), 110-67.

Ghayad, R., and Dickens, W. (2012). What can we learn by disaggregating the unemploymentvacancy relationship? Public Policy Briefs 12-13 Grijalva, D., and Neumark, D. (2013). The Employment Effects of State Hiring Credits During and After the Great Recession. Mimeo Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.

Nakamura, E., Sergeyev, D., & Steinsson, J. (2017). Growth-rate and uncertainty shocks in consumption: Cross-country evidence. American Economic Journal: Macroeconomics, 9(1), 1-39.

Schneider, D. (2015). The great recession, fertility, and uncertainty: Evidence from the United States. Journal of Marriage and Family, 77(5), 1144-1156.