Stimulation and Contraction of the Economy Assignment - 1650 Words

Stimulation and Contraction of the Economy Assignment (Essay Sample) Content: Stimulation and Contraction of the EconomyNameInstitutionLecturerCourseDateThe Romania-American Foundation The Romania-American foundation works towards harnessing the optimism and the business experience with Romanian ingenuity and skills. All these are aimed at a more democratic, prosperous and entrepreneurial society in Romania. The organization does this by making social investments in education, entrepreneurship and community development. The foundation aims at supporting the civil society and initiates a business-like approach that they believe will bring an added value. The foundation pioneers the global entrepreneurship week that is celebrated in over 125 countries. During the global entrepreneur week, partner organizations conduct at least one activity, event or competition. One or more host groups in each country run the Global Entrepreneurship Campaign. The focus on internationalization raises significant questions in many areas. The first being how the Uni ted States engagement with the international organizations leads to analysis through the institutional approaches. Another one is how the development institutions within the US interact with the activities of the international organizations and the extent to which the US can influence the institutional characteristics of those organizations. The president and Congress have a significant role to play to stimulate the economy and create jobs. The first topic on the mind of every American citizen is jobs. The current job market worries people most on high unemployment and slow recovery. The president and the Congress alike have both embraced the short-term, temporary financial expansion to create jobs especially in times of labor market weaknesses. In the face of economic crises, economies all over the world know the importance of government action. In the year 2009, the Congress passed an economic stimulus bill worth $787 billion that included almost $500 billion worth of investments in different sectors of the economy. Of this, nearly $300 billion was in tax cuts. Another easy way the president and the Congress can stimulate the economy is through tax cuts. Tax cuts will enable companies to retain most of their earnings. The light of this step will be that small businesses and large corporations will turn around to hire more employees. Besides, the capital expenditure spending will increase, and thus require the sectors concerned to hire more workers. The hiring of more workers will be aimed at keeping up with the growing demand for goods and services as businesses will be spending more due to tax cuts. Funding the state and local governments will also be significant in stimulation of the economy as the funds will be having a greater multiplier effect. The states will then stop raising taxes on residents, and this will help lower the rate of unemployment instead of punishing the already over-taxed citizens. Moreover, when it comes to the economy, the president is at the mercy of the business cycle. The president does not have to wait for the Congress when it comes to boosting the economy. To contract the economy, the president, and Congress can raise wages so that the workers can contribute more in taxes. Besides, in the process, the president helps families to work their way up the poverty line giving them new momentum in raising their minimum wages. The president and the Congress handle the fiscal policy. (Guerson, 2013). The Federal Reserve is also not left out when it comes to stimulating or contracting the economy. The Federal Reserve has the primary duty of pursuing its mandate for stable prices and maximum employment. When the economy is under struggle, the Federal Reserve decreases its target interest rates and raises them during high inflation. On the other hand, if the money supply expands, then the economy grows. The primary role of the Federal Reserve, in this case, is to find the right economic balance. During recessions, it expands the supply of money while during recoveries; it contracts the supply of money thereby keeping both inflation and unemployment at a balance. All these Federal Reserve decisions constitute the monetary policy of the economy as it controls the size of the nations money supply. The Federal Reserve can either stimulate or contract the economy depending on the right action required. (Bernanke, 2013). According to Reich, (2010), policymakers have to focus on the restoration of the institutional role of governing trying to restore the economy. They get motivated to stimulate or contract the economy especially now that the Federal Reserve has signaled that it will not tighten in response to the financial stimulus. As such, fiscal policymakers are motivated to try to boost the economy. Besides, they are largely constrained in how to make the monetary policy more expansionary with respect to economic contraction. The confidence that monetary policy makers will be purely accommodative s ends them a motivating signal and as such, the multipliers can be quite high in those economies with little output gaps.( Reich, 2010) The Federal Reserve constantly monitors the economy of the United States and conducts transactions in the open market. The Federal Reserve has one goal of maintaining stability in the financial system. According to Bernanke, (2013), a lack of a stable financial system means the credit market is grinding to a halt, thus stagnating the economy. Another one is fighting inflation through price stability as inflation will always rob everyone all their purchasing power and in wages and investments. The Federal Reserve is playing an active role in monitoring prices to counter inflation whenever it poses any threat. The US Federal Reserve also wants to see full employment by tailoring the policies to accommodate an economic environment that is full of work. While focusing on the interest rate stability, the Federal Reserve is not necessarily concerned with w hether the interest rates are high or low. Instead, it focuses on whether or not the interest rates are stable. Similarly, the Federal Reserve is more concerned with whether or not the value of the US dollar is stable and not whether it is strong or not. (Bernanke, 2013) On the strength of the economy, the Federal Reserve is now allowing the global economy strength to guide the timing of the rising or lowering of the interest rates. Besides, the Federal Reserve now opts to emphasize on how the world economy will influence the economy of the US instead of sticking to its authority of focusing on employment and inflation. The Federal Reserve holds the interest rates at zero, but some advisers are labeling it a lost opportunity. Many concerns over the strength of the global economy prompted the Federal Reserve not to lift the rates. (Ashbee, 2010). The strengths of other economies outside of the United States have an enormous impact on the Romania-American Foundation. If the dollar is stronger than the res...