Current State of the US Economy and Economic Policies

Currently, the US economy is recovering from an economic recession. For the

past few years, expansionary fiscal and monetary policies have been executed to promote
a rise in the GDP. The economy is experiencing a slight short run inflationary gap due to
a slow increase in personal income and a relatively stable but diminishing unemployment
rate. Recent actions by both the government and the FED are following the current trend
by imposing expansionary policies. These policies aim to stabilize the economy along its
expansionary path as to not dip into another recession.

On Friday Dec. 7th President George W. Bush announced that he will pass an
alternative minimum tax bill which will reduce income tax for mid-bracket tax payers.
This example of expansionary fiscal policy aims to reduce taxes to increase GDP and
continue along the expansionary cycle. The lower tax level will increase disposable
income for household and would promote consumer spending. The increased spending
would then be multiplied by the multiplier effect once it is spent in the economy. Not
only will this policy increase the GDP, it will allow struggling low income tax payers the
ability to make payments and still have extra disposable income to spend. The
government believes the higher ability to pay off debt will also help the country recover
from the mortgage crisis.

On Tuesday Dec. 11th the Federal Reserve lowered interest rates by a quarter
point. The intended outcome of this lowered rate was an increase in investment spending
and an increase in GDP. However, speculators of a sharper decrease in the interest rates
(half a point) invested heavily in stocks and caused the stock market to plummet 290
points. Although the economy might seem in distress of another downturn, the FED
assures that it is only a temporary effect and stood adamant about the quarter point
decrease. They stated further cuts are possible if a severe downturn in housing occurs and
the mortgage lending crisis worsens. The effect that the lowered interest rate had will
occur in short run only; that is in the long run the effects will match the FED’s projected
goals. The FED also lowered the discount rate to other banks a quarter point. These
policies are an example of expansionary monetary policy by the Federal Reserve to help
promote growth in the economy.

The Federal Reserve and the US government are both creating policies to assist
the economy along its expansionary cycle. During this recovery period, both monetary
and fiscal policies have aimed to increase GDP. This expansionary trend should be
continued because the economy has not reached its peak. A further increase in economic
growth is healthy, and to ensure that growth, both fiscal and monetary policy should
continue on the expansionary phase.