Fiscal and Monetary Policy and Economic Fluctuations Term Paper

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Fiscal and Monetary Policy and Economic Fluctuations

The global economy was relatively doing fine more than five years ago before it was hit by economic downturn or recession. During this period, the American economy was at its peak, particularly in the fourth quarter of 2007. However, this was followed by a mild recession at the beginning of 2008, which eventually turned into a severe credit crisis across the world approximately one year later. While only a few countries escaped the economic recession, virtually no country could avoid the severe bear markets in stock (Norris, 2012). Some countries like the United States experienced changes in gross domestic product and stock markets. Since it has the best record of the main developed countries, the United States was severely affected by the recession. As the economic downturn came to end, America started the process of recovery from the effects of the recession. This recovery process has been characterized by changes and economic fluctuations in various aspects including interest rates, unemployment rate, and inflation within the past five years.

Current Economic Situation in the U.S.:

As compared to five years ago, the U.S. economy has been resilient as it continues to recover from the effects of the economic downturn and ruins to an improved health. Currently, the country's economy is weathering federal budget reductions and higher payroll taxes. Moreover, economic growth is picking up to an extent that some economists predict that the already five-year expansion may last longer (Klimansinska & Chandra, 2013).

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The signs of U.S. economic resilience are evident across the board such as continued spending by households, rebound of home sales, increased investment and hiring by businesses, and the surge in the automobile industry. As America's economy continues to shed the excesses of the past like unprecedented levels of consumer and corporate debt, banks have healthier balance sheets while credit is slowly easing. Generally, the United States economy is growing albeit at a slow pace of a listless 2% annually.

However, the recent resilience of America's economy has not been reflected in interest rates, inflation, and unemployment rate. The rate of inflation in the United States declined to a 4-year low in October 2013 and reached its lowest rate since October 2009. According to recent releases, the inflation rate in the United States eased to 1% in October 2013, which was a 0.2% decline from the previous month. Interest rates in the United States have continued to rise, particularly on 10-year Treasury bonds. In February this year, these rates had risen to 2.27%, which was an indication of approximately 10% loss in the price of the bond. Nonetheless, the Federal Reserve has kept the interest rate on long-term bonds to an unexpected low through its unconventional monetary policy. This implies that the main reason for the current interest rates is the unconventional monetary policy i.e. quantitative….....

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