Memorandum Business Economics

Business Economics

Memorandum

Mr. President

As you are well aware, we are currently experiencing a severe recession. Analysts have suggested that this condition will likely last another year. We have high unemployment and deflation. The current unemployment rate stands at 8% and is expected to continue to rise. The inflation rate is -2.4%. You have graciously given me the task as your Senior Economic Advisor the job of changing things around.

First, I offer a little economic primer as to how we got here. I will suggest what tools we have available to help bring stability to the economy. I'll let you know what advice our expert staff have provided. I will tell you whether I agree or disagree with them. Finally I'll suggest what I think we ought to do.

Business Cycle

While the general trend has seen economic growth, the economy still goes through a cycle of ups and downs. These gyrations define the business cycle (McConnell, 2008, p. 127). Cycles are expected but their onset, strength and duration are difficult to determine (Fiscal Policy vs Monetary Policy, 2009). The four phases that accompany our growth trend are: (1) Peak: Employment has risen to nearly 100% and GDP is near or at its capacity both suggesting that the expansion has reached its zenith. (McConnell, 2008, p. 127). (2) Contraction or recession: A time when GDP (2 quarters in a row), income and employment all decline (McConnell, 2008, p. G-22). (3) trough: when the recsession is at its worst phase (McConnell, 2008 p. 127). (4) Expansion or recovery: following a recession when GDP, income, and employment rise (McConnell, 2008, p. 127). Economists generally agree that consumer and business spending or aggregate demand determine the level of employment and output (supply) (McConnell, 2008, p. 128). Profit from sales and services dictate how much resources and employment are used and how much production occurs (McConnell, 2008, p. 128). Because the U.S. is a market economy, swings will inevitably occur (Fiscal Policy vs Monetary Policy, 2009).

Fortunately the are economic policies that have evolved which allow our government to manipulate aggregate demand and supply. Our goal for our economy's performance has been an annual growth in GDP of 2.5-3%, unemployment of 5%, and inflation around 3-4% (Herman-Ellison, 2003). In the past it was thought that we could just leave things alone and let the economy work through these business cycles. John Maynard Keynes, a famous economist, said that instead of sitting back, the government can use two policies: Monetary and Fiscal policy (Herman-Ellison, 2003).

Fiscal Policy and Monetary Policy