Summary of these key indicators for the U.S. economy
One of the key indicators of the US economy is current inflation. As at May 2016, the inflation rate stood at 1.02% (The World Bank, 2016). However, between January and May, the average inflation rate has been 1.01 percent. The second indicator is the unemployment rate recorded at 5.5 percent as at the end of May (The World Bank, 2016). The average for the year thus far has been 4.9 percent. The real GDP growth is also a critical indicator. In the first quarter of the year 2016, which ended 31st May 2016, the real GDP rate stood at 0.8 percent (The World Bank, 2016).
The U.S. economy in terms of the business cycle
Business cycle refers to a series/cycle of economic expansion and contraction. It is a period of downward and upward movement of the economic factors often occurring in a sequence. The business cycle is characterized by four essential phases including peak, trough, expansion and contraction. Peak refers to the highest value reached by some quantity while the trough is the lowest turning point. The expansion, on the other hand, is a period of expansion. Contraction is a period of economic decline.
Based on these definitions and founded on the summary as provided in the previous section, it is apparent that the US economy is in the contraction stage. As such, the inflation and unemployment rates are exceeding rate, even though slightly. This necessarily implies that the US is experiencing what Ma (2015) acknowledges as a low-growth business cycle. The regressing nature associated with these rates is the likely causes of a slow real GDP rate.
Proposed monetary policy
The state at which America is in requires the implementation of expansionary money policies. The government has to spark an increase in the level of economic growth, rather than suppressing it. There are several tools and options through which the government can implement an expansionary approach. One of these is the treasury bonds. Often identified as T-bonds, a treasury bond refers to a marketable, fixed-interest debt security of the US government, which is characterized by a maturity that exceeds ten years. The US government could opt to buy the treasury bonds that the public holds. This necessarily means that the money in supply will be increased. With an increase in the money supply, it implies that people will now have more money to undertake essential business activities. For instance, some people might opt to come up with business organizations ranging from small-sized to large ones. Particularly for the medium-sized and large enterprises, the owners cannot work on their own. Instead, they will be forced to employ more people to assist in facilitating the business operations. It is expected that those who were not employed before the establishment of the enterprises will be the likely candidates to secure the new jobs. With this, the issue of increasing unemployment rate will be easily and quickly curbed. The same can be said about the real GDP. As it was revealed by Ma (2015), business activities form the primary driving forces for a country’s real GDP. Thus, with the level of business activities increased in the US, it is expected that the country’s production will increase tremendously such that it will exceed the current levels, which have been found to be declining.
While this is the case, the purchase of Treasury bonds might not be helpful when it comes to the issue of inflation. According to Ma (2015), where the supply of money increases at a faster rate when compared to the level of real output, inflation tends to occur. In the light of this, it is important to implement a further expansionary money policy tool. The most suitable in this case is the interest rate. It is suggested that the government should seek to increase the rate. The essence of increasing the interest rate is to increase the incentives to save. A higher rate of interest, at the same time, would make borrowing more expensive. With this, there is a high chance that the money supply will be contained to such levels that match the real output value. However, it is better if the money in supply went below the real output levels.
References
Ma, C. F. (2015). An Insight on the Rationale of Using Expansionary Monetary Policy during the Great Recession. University of Toronto Economic Review, 58.
The World Bank (2016). Economic Indicators: US. Retrieved from http://data.worldbank.org/indicator
