The economic growth of a country is affected by many factors that determine the demand and supply of goods and services. The first factor is the rate of interest that banks charge for lending out money. The second factor is the rate at which businesses create opportunities of employment. Businesses should also retain those employees for there to be sustained economic growth. The last factor is the rate of exchange of money in business activities that are commonly referred to as liquidity. For there to be good economic growth, money should be exchanged at a high rate for it to earn a good return to the owner, (Rosengren, 2013). Money that is kept idle is not useful to a country, and it usually loses value. These three factors affect the growth and development of a country’s economy and also determine that country’s standard of living.
When these three factors are negatively affected by the normal forces of aggregate demand and aggregate supply, the country is said to be in a recession. When they are, being positively controlled by the forces of demand and supply, the country enjoys good economic growth and its citizens also enjoy a high standard of living. When a country is in recession due to the imbalances of demand and supply, measures are taken to correct the imbalance. Such corrections are necessary in any economy. They are meant to ensure that, what is causing unemployment and high interest rates is brought back to levels that are favorable for the growth of the economy. This can be done by drafting economic policies that control demand and supply of both employment opportunities and interest rates and goods and services.
The year 2008 was a time in the USA when the country was in a recession. A policy was prepared by” Eric Rosengren, President of the Federal Reserve Bank of Boston” to try and bring the interest rates down and recover the employment opportunities that had been lost. The policy was important to the country because it proposed measures that would address the high cost of producing goods and high interest rates. The consequence of high cost of production is that companies are forced to reduce the number of workers by laying off some of them. The reduction of workers is necessitated by the low demand of produced goods at the supermarkets because they are very expensive such that only a few can buy them. In addition, companies send some workers home because the banks lend money at rates that are very high such the company cannot afford, (Rosengren, 2013). It is usual for companies to borrow money from banks to invest and in so doing increase their profits. During a recession, it is not possible to expand investment because of low demand for produced goods and high rate of interest rates. The policy that was prepared by” Eric Rosengren, President of the Federal Reserve Bank of Boston” did not clearly state how it would bring back the lost job opportunities and lower the interest rates.
The first reason the policy did not address the recession problem well is because it proposed that the bank will borrow money and invest it. This money was eighty five billion dollars per month that they would invest by buying “treasury and mortgage backed securities” from the government. The rate of interest of borrowing this money was higher than average. Though this was a good idea, the policy did not take into consideration the higher than normal rates of interest. The normal rate of borrowing money from a bank when there is no inflation is lower and; therefore, the policy was not the right one. Despite, the fact that the securities earned more during periods of recession; this was not an enough reason to borrow money at such high rate. Securities were being sold to the public to help bring the excess money in public hands to the government and help control the high rates of interest. The move to buy securities was good in the short term as the bank would have earned a higher than average rate of interest from the investment. However, in the long-term recession would come to an end, forcing the government to reduce interest it offered on securities. This would be a loss to the bank because the bank loan interest rates were constant while the rate of return from securities usually changed, (Keman, 2009).
The second reason why the policy was not the right one is because it was not clear which sectors were to create employment opportunities. The American economy before the recession had recorded increased employment rates. This is because companies borrowed money from banks at a reasonable interest to expand their investments. Increased investments usually come with the new job opportunities. During the recession period, these people who had been employed lost their jobs due to reduced demand for industrial goods. The unemployment rate increased from 7.2% to 7.9% as a result of the 2008 economic recession, (Rosengren, 2013).
The third reason why the policy was not right is because it was not clear how it would lower the inflation rate. The Federal government reported that inflation had increased by two percent. The high rate of inflation caused demand for goods and services to fall. This meant that businesses would produce fewer goods, and to industries, they would have to lower production. Lowering production would in actual sense mean that resources that were previously in use would be idle. For example, machines and workers would be less utilized till the demand for goods rises. Workers, therefore, have to be reduced to cut the cost of production. The policy was silent on how it would address the rising unemployment and; therefore it was not the best. However, the policy might have failed to address the problem of high inflation because stock markets were showing signs of quick recovery, (Keman, 2009).
In conclusion, the policy by “Eric Rosengren, President of the Federal Reserve Bank of Boston” was a good move that would have helped the economy to recover from economic recession. However, it was good for short term measures but not for the long-term economic recovery and growth. If failed to state clearly how employment opportunities lost would be recovered, after the recession. It is expected by economic analyst, that during periods of inflation and high interest rates, that companies and other forms of businesses do not expand investments. Lack of increase in investment is the leading cause of unemployment in the world. The policy would have, therefore, served a short-term recovery measures.
References
Keman, H., Paloheimo, H., Whiteley, P., & Research, E. C. (1988). Coping with the economic crisis: Alternative responses to economic recession in advanced industrial societies. Los Angeles: Sage Publications.
Rosengren, E. S. (2013, November 4). “Assessing the Economic Recovery”. Retrieved from Federal Reserve Bank of Boston: http://www.bostonfed.org/news/speeches/rosengren/2013/110413/110413text.pdf
