Macroeconomic Analysis the State of Assessment

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However, the recovery has not, as some might expect, included improvements to the unemployment figures or an increase in inflation. The unemployment figures can be explained partially in that unemployment is considered to be a lagging indicator. Inflation, however, is not a lagging indicator. As such, it would be expected to increase if the economy was increasing strongly, given that interest rates are very low. Not only is inflation not increasing, but it is decreasing, and long-term interest rates do not indicate that that the U.S. needs to be concerned with inflationary pressure either.

The case for fiscal stimulus is that government spending is going to increase the GDP. Given the equation GDP = C + I + G + X -- M, we can understand that consumer expenditures are going to remain relatively low in the current economy as the result of the high rate of unemployment.

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Business investment might be expected to increase given the low interest rates, but that has yet to materialize. Two factors influencing that are the expensive dollar, relative to the euro certainly and the yuan, which the Chinese government is holding artificially low to spur Chinese exports. These currency influences stunt U.S. exports while encouraging U.S. imports. GDP increases, therefore, can be understood to be coming largely via increases in imports. The need for stimulus is therefore to spur domestic consumption, which ideally would serve to stimulate business investment given the low rates. Fiscal stimulus would therefore increase the GDP directly, and ideally would have spinoff effects that would increase C, I and E. As well, pushing growth beyond the limited growth currently associated with M.

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