Macroeconomics -- Review of Age-Old Economic Concepts Term Paper

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Macroeconomics -- Review of Age-Old Economic Concepts through the Eyes of Current Events in the Newspapers of Today

It has been a unique privilege to embark upon the study of economics during this period in our nation's economic history. One might be tempted to say this is a strange statement, at first. Would it not be better to begin to study economics during a boom period, such as the nation enjoyed during the 1990's? But one must disagree. The most interesting things about today's economy are the many contradictory aspects of its current, halting and painful economic recovery from a recent recession.

The Federal Reserve System and Recent Fiscal Policy

When the economy first began to sour, one of the first things the Federal Reserve chairman, Allan Greenspan, did was to lower interest rates. Lowering interest rates means that it is not in the consumer's interest to save money, because banks give very little interest on loans. However, all is not bad for consumers in a state of lowered interest rates. When interest rates are low, and they were at an historic low for America during the recession of the first part of the 21st century, consumers can and should use the opportunity to borrow money from banks to make large purchases, such as cars, or to buy a home or to make improvements to their home.

The lack of incentive to save when interest rates are low does not extend merely to such large purchases, however.

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The main reason interest rates have an anti-recession effect is that there is an attempt, on the part of the Federal Reserve, to encourage consumers to spend their dollars in all spheres of the economy. This encourages businesses to produce more goods to meet increased consumer demand, and to hire more workers to meet such increased consumer demand and spending.

Unemployment and Business Cycles

If unemployment were so easy to remedy, simply by lowering or raising interest rates, the business cycle would not be as nearly difficult to manage as it is, however. Unemployment can be affected by many factors. For instance, the recent economic downturn caused unemployment to escalate mainly in the white-collar sector of educated professionals, circumventing current economic wisdom that better education means a better job. Thus unemployment can affect certain sectors of the economy more than others. Also, more and more businesses are taking advantage of cheaper labor costs overseas. Thus, even if consumer demand increases, this does not mean that employment, particularly employment in all sectors of the economy at all times will increase.

Deflation, Inflation, and Monetary Policy

Another concern of the Federal Reserve was that the U.S. economy might experience deflation, if the recession hit the United States economy particularly hard. What could be so bad about lower prices,….....

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