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TABLE OF CONTENTS

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1.0 Introduction

In 2007, the financial crisis triggered by liquidity shortfall in the United States (US) banking systems has dragged the world economy into recession. The impacts were devastating. It affects most developed nations such as United Kingdom (UK), Japan and European countries and also the emerging economies like Korea, Russia, Brazil, India, and China. The liquidity issues of the banks killed well known financial institutions, followed by downturns in stock markets around the world. The collapse of property markets raises the non performing loans (NPL) in banks. The oil price surges over hundreds of dollars per barrel. Collectively, all these crises have put tremendous pressure on US economy. In terms of economic variables, the US economy suffered great fall in GDP at record rate, significant rise in unemployment rate at record high, homes sales at record low and so on. It is considered the worst financial crisis after the Great Depression in 1930s. As such, governments in other countries all around the world have no choice but to engage in economic policies to stop their economy plunging deeper into recession. Many were hopeful that these new policies would help to economy recover, but the fact is no one knew for sure whether they would. This paper will look into United States (US) and discuss how government and central bank react to such global economic crisis. We discuss types of macroeconomic policies adopted to prevent US economy to continue fall into recession.

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machines. The US production is greater than the sum of production by Japan and Germany. and technology in these countries (Taylor 2010). Figure 1: US Gross Domestic Product (1960 – 2010) Positive and continuous economic growth will improve and benefits economic well being of individuals and is measured by real GDP per capita.2. It sounds little but it means the real GDP has more than tripled.0 Background of US Economy Before that. Looking at these variables gives a better picture on how economy performs during bad and good times. 3 . inflation rate and others. the US real GDP has been growing averagely at 3 percent (Taylor 2010).1 Gross Domestic Product (GDP) GDP is the total value of all new goods and services produced in the economy during a specified timeframe normally a year or a quarter. 2. Let’s look at economic variables of economic growth like potential GDP and actual GDP. unemployment rate. As shown in Figure 1. Macroeconomist uses GDP to measure the size of the economy and tells how countries are performing relatively to each other. it is useful to look at how US has performed economically before crisis. inflation and interest rates changes as well. Increasing real GDP per capita increases the standard of living in the economy. for the past 40 years. that is what made by all workers. When real GDP changes. other economic variables such as unemployment.

about 50. (Spreen 2010). Normally unemployment rate is high during recession period because people get laid off and is hard to get new jobs. the recession has killed about 2. Figure 2 shows that unemployment rate increase rapidly during recessions.2. A recent labour statistic report by US Department of Labour states the number of people who are unemployed for more than one year has increased significantly since the recession started in December 2007. 4 . They are mostly men aged between 25 and older.2 Unemployment Unemployment rate is the percentage of available working force that is actively looking and ready for a job but unable to get one.6 million jobs in the US economy.000 workers were laid off by firms across the country and about 170. Figure 2: US Unemployment Rate with Recessions In 2008. It is evident the recent crisis has caused a steep increase in unemployment from 2007 to 2010. On one single day.000 jobs were eliminated on the first month of 2009 (Herbst 2009).

inflation increased before recessions and decreased during and after recessions (Taylor 2010). inflation changes also. which would cut into profits of businesses. Figure 3 shows the inflation of US since 1910. Besides. it causes deflation spiral. a rare occurrence over a period where inflation is negative and the average price level falls. Figure 3: US Inflation Rate (1910 to 2010) 5 . It almost happened to US economy. Now.2. where core inflation rate had dropped to record low at about 0. The latest consumer price index (CPI) shows declining trend in second quarter of 2010.3 Inflation Besides output and unemployment changes over time. No one knows better how devastating the impacts of deflation than Japan. thus bring down consumer buying powers. which has jeopardise Japan’s growth over a decade till now. The opposite is deflation. US have been running trillions of deficit for two year consecutively (Colvin 2010). Inflation is basically the increase in price averagely for all goods and services over a period. firms will cut resources like labour or capital investments. In response. Deflation if happened would lower down prices.9 percent (Lee 2010). Deflation can be serious issues. this poses great challenge to US government as they are contesting whether to cut spending to boost the weak economy or keep stimulating it worrying to do so will cause inflation and record high deficit. It is evident the inflation is on the low side. Famous economist like Paul Krugman worries US economy would moves closer to deflation (Krugman 2010). a situation where consumer adopt a wait and see attitude that will delay their purchasing decisions in anticipating for lower falling prices on goods and services. For past 40 years.

4 Interest Rate Another variable to look at is the interest rates such as mortgage interest rate and savings deposit rate by banks to public. interest rates rises before recessions and decline during and after recessions. Interest rate is powerful as it determines or influence people’s economic behaviour.2. In history. the Fed fund rate was reduced to almost zero percent in order to increase money supply in the economy as an intervention to curb prolonged recession and to stimulate the economy (Figure 4). In 2008. Such intervention reduces cost of borrowings and injects all kinds of loans into the economy. Figure 4: US Federal Fund Rates 6 . and federal funds rate charged by federal banks to others banks on short term loans. the Treasury Bill rate by government to public.

Conversely. firms.0 Aggregate Demand Aggregate demand (AD) is the total demand for goods and services or real GDP by households. Figure 6: Changes in Aggregate Demand 7 . when exchange rate strengthen or foreign income weakens. AD increases (Panel B). Figure 5: Changes in Quantity of Real GDP Demanded AD changes often and thus often shifts. AD curve shows the relationships between price and quantity demanded (Figure 5).3. when monetary policy cuts money supply or raise interest rates. governments and foreigners. Conversely. When price increases. AD decreases (shift leftward) when fiscal policy decreases government spending or increase taxes. monetary policy. AD increases (shift rightward) when above factors are opposite (Figure 6). and price for foreign products decreases in relative to domestic goods (Panel A). and expectations. when price falls. price of present goods increase relative to future. The influences that shift the AD curve are fiscal policy. international factors. and when expected inflation or expected profits decline. real GDP will fall due to decline in demand for quantity of real money.

During recession. When price goes down from P1 to P2.3. Contraction in output of firms leads to downsizing where firms lay off workers and reduce investment in order to reduce operating cost. The cycle called the multiplier effect. stock markets. When this happened. This reduces capital investment by firms. Figure 7: Negative output gap: Shift in Aggregate Demand 8 . The primary tools used include changes in government spending and taxes to influence the aggregate demand. This leads to further decline in consumer spending thus dramatically fall in aggregate demand again. firms decided to supply less by reduce output because sales was affected during recession.1 Fiscal policy Fiscal policy is a demand management policy government used to fight recessions. aggregate demand declines and shifts the AD curve from AD1 to AD2. This leads to decline in investments and rise in unemployment and decline in average disposable income. demand for goods is low due to demand shock caused by collapses in property market. the price level goes down and the real GDP declines (Figure 7). failing banking sector tighten lending rules due to credibility issues of borrowers. Besides that. to minimise impact of recessions and to stabilise economic fluctuations when it occurs by stimulating aggregate demand. thus making access to credits tough for firms. and also rapid rising in petrol prices. Collectively. financial markets. These collapses create uncertainty that forced households to save more and spend less.

people will spend more.As consumption by households and businesses makes up about 71 percent of real GDP in US economy. Figure 8: The effects of an increase in Aggregate Demand Government got to be cautious not to over stimulate the aggregate demand because it would cause inflationary gap. AD curve shifts from AD1 to AD2. AD curve shift right. That is when AD curve shifts out beyond potential output level. The cycles in the long run will impact the potential GDP. the AD curve shifts right. unemployment rate will fall. labelled by LRAS curve. household spends more because their disposable income is higher after taxed. the government must stop the recession from going deeper by intervening with expansionary fiscal policy (Taylor 2010). P3 and lower real GDP. There is an inflationary gap. firms are encourage to invest in capital. which will cause short run aggregate supply (SAS) curve to move leftward. it creates jobs to the nations. businesses sales improve and expansion requires more capital and labour. education and healthcare. As such. So. and leads by rising inflation caused by an inward shift of SRAS curve. When government give investment tax credits to firms. at higher price level. income will rise. When government increase spending on building roads. as shown in Figure 8. As such. Real GDP will increase from Y1 to Y2 and price level increase from P1 to P2. price level at P3. as AD increases. transportations. The same effect goes to increase in government spending. As the SAS moves inward from SAS1 to SAS2. 9 . When government reduce taxes directly or indirectly. it intersects the AD2 curve. A higher price encourage higher wage rates. Yfe (full employment equilibrium). Either way.

rail and healthcare. President Obama approved another largest multi billion dollars stimulus package since the Great Depression. Figure 9: Expansionary Fiscal Policy System 10 . President Bush passed the Economic Stimulus Act where most tax payers will enjoy a USD600 and USD1200 tax rebates each and those who got children. businesses were given investment tax relief and tax refunds for losses made with paid tax back in 2003. will get additional USD300 more per child. to save and create millions of jobs in two years time. and tax credit for hiring (Meckler 2009). investments in energy and education sectors. Figure 9 explains how expansionary fiscal policy mechanism impacts the aggregate demand in a simple flow chart. with emphasis on providing financial aids to local and state governments. Besides individual benefits.The stimulus package approved in 2008 and 2009 were good examples of fiscal policy. Besides individual benefits. businesses also get tax breaks when they invest in new plants and equipment. In 2009. building infrastructure like highways. In 2008. It is expected to spur consumer spending. The stimulus package cost the USD168 billion (Associated Press 2008).

Given the tax cuts and spending increase by government. massive government spending increase budget deficit which needs to be financed. If these countercyclical measures are timely enough and if it is of right magnitude.3. This is a time lag issue. AD curve shifts left due to decline in total demand. the recession would be short lived and small because such measure can offset the drop in demand and bring real GDP back to potential GDP. High financing of government budget deficit means less private investment thus created crowding out effect on private sector. but it could take years. Without government intervention. US budget deficit is running at more than 10 percent of its GDP (Figure 11). In recession. the AD curve shifts right. With government stimulus package recession could recover faster. US total federal debt level is about 95 percent of GDP (Figure 10). This is because they are sceptical and concern about future high taxes liability when government has to repay its debt borrowed to implement the stimulus package. This happens because sometimes it takes years to implement a bill even though it was approved fast initially. the recession will recover eventually. Besides. And consumer uncertain reaction towards future tax liabilities dampens the purpose of stimulus. If these responses to increase government spending and tax cuts are late and not spontaneous. tax cuts do not always increase consumer spending because consumer might only spend some and save some of it. it enlarges government budget deficit and thus the risk in running into high debt to GDP level in the long run. given the worsening budget deficit situation in US. Last but not least. it is important to assess the long term budgetary cost as well. The problem here is imperfect information constraints government ability to assess the value of multiplier effect thus might over boost the demand with its policy. As such. the stimulus package is deemed not effective. at a point where the economy has already recovered. US total spending is running at about 44 percent of GDP (Figure 12) 11 . Besides its ineffectiveness.11 Effectiveness of Fiscal Policy Besides short term effectiveness. If the measures are implemented too late. the excessive growth in total demand will probably leads to an increase in inflation. people save more rather then spend it.

Figure 10: US Debt per GDP Figure 11: US Budget Deficit Figure 12: US Total Spending 12 .

When interest rate rises. Figure 14 shows the total assets of Federal Reserves balance sheet. The purpose is to provide easy credit as it worried that lack of liquidity or credit in the financial market will harm the economy. a change in money supply affects aggregate demand through its impact on interest rate.2 Monetary policy Monetary policy is used to influence the economy by varying money supply and interest rates to influence demand by Federal Reserve (Fed) the central bank of US. The greater the quantity of money. So. Like in 2008. 13 . the greater is the level of aggregate demand. thus jeopardizing the whole financial system and economy. Fed reacted to the crisis by reduce interest rates and increase money supply. worrying Bear Stern falling will affect its creditor to fail together. However. dealers. So these actions taken were credit easing activities used to alleviate the financial crisis. The purpose is to save these firms from failing and thus create a domino effect through the economy. the interest rate will fall. the interest rate will rise. Another new way created is makes loan to others financial firms that are not banks like brokers. The same action applied to other failing firms like JP Morgan and AIG. which also means monetary easing. imagine Fed sends money to your mailbox. mortgage backed security (MBS). households and firms will save more. The securities include short term commercial paper by financial and non financial firms. Before recession. Changes in money supply will change the interest rate. household spend less on consumer goods and firms cut back on investment. For example. Conversely. spend less and borrow less. it shoots up to over USD2 trillion and is trending up. to save the housing market from busting the Fed bought MBS hoping to reduce the mortgage interest rate. Fed bought its assets. There are many ways to do this. In addition. For simple illustration purposes. The Fed can increase money supply by buying into government securities or by increase liquidity reserve ratios. It is evident the size has increased tremendously since the recession. You would keep some and spend some so the demand for goods and services would increase. when Fed reduces money supply. the size was about USD1 trillion. securities backed by student loans or credit cards. This will reduce the aggregate demand. If Fed increases money supply. these old and new credit easing facilities will increase Fed reserves. After recession. thus resulting in increase of money supply in the market. and security portfolio held by big insurance player AIG or investment bank Bear Sterns.3. and insurance firms. The Fed can also introduce new ways to change money supply such as buying into private securities.

As illustrated in previous section. people will save less and consume more. money supply will increase and interest rates will fall. we mean consumption. This is what happened when Fed makes open market purchase to change interest rates. By spending. So. Consumer consumes less if price is higher and consume more when 14 . spending will increase.25 to 0 percent by increase money supply (Foley 2008). where price is the interest rate. Figure 15: Relationship between Interest Rate and Money Supply When interest rates is low. investment and net exports. inflation will rise (Figure 15). It shows the point where consumer is willing to consume at each price. When interest rate falls. The relationship between interest rate and consumption looks like a demand curve.Figure 14: The Size of Fed’s Balance Sheet When reserves are raised. consumption will increase in the long run. the Fed has lowered the interest rate dramatically from 4.

the firm needs to produce additional output to finance its debt. So. they can use it for their best alternative investment that generates higher returns. when interest rate is high. Conversely a tax credit will shift the consumption line to the right. At lower interest rate. This means that firms will only borrow if they are very confident about their investment project success. firms are unlikely to invest because the cost of borrowing is higher. people buy fewer houses because the opportunity cost is higher. thus a movement along the consumer share line (Figure 16). when the interest rate is high. when the cost of borrowing is lower. people will more likely to invest or buy houses because the cost of borrowing is cheaper. When interest rate is reduced. where people find it’s easy to repay their mortgage. Conversely.the price is low. the consumption line will shift to left or right. It is evident that high interest rate discourages investment and lower interest rate encourages investment in both firm and personal levels. When this happened. 15 . firms tends to spend more by investing in more of these facilities. That is why firms seldom expand during recession. the consumption line will shift to the left. For example. Same goes to household investments. businesses will invest in new machinery and equipments. This is shown in Figure 17. A similar relationship exists between interest rate and investment. Changes in price (in this case interest rate) leads to movement in quantity demanded. To cover the higher cost. Rather than using their money to pay for higher mortgage. Conversely. They need funds to finance such expansion. So. Figure 16: The consumption share and Interest Rate Any other factors that affect the consumption. an increase in taxes in consumption will reduce consumption because consumer has less money to spend after taxes. the cost of borrowing is lower. build new building or factory.

A change in firm’s expectations toward future would also shift the investment line. the net export will increase. As international investors shift their funds out of US to London. Conversely. thus increase investment at a given interest rate. it will invest on the equipment. So. the demand for US dollar by international investor will decline because they will move their funds to other non-dollar denominated assets in order to earn more in doing so. the demand for US currency decline and puts downward pressure to the US currency or dollar exchange rate. when interest rate decreases. US import will become lower because imported goods are less attractive now as they are more expensive now. Frankfurt. For example. net export will increase. the investment line will shift to the right. if the firms feel that technology will lower their operating cost in future. When interest rate is low. 16 .Figure 17: The investment share and Interest Rate. the lower exchange rate increases US export to foreigners because it is cheaper and yet attractive to foreigners. The same relationship goes between interest rate and net exports. we first need to look at relationship between interest rate and exchange rate. and not elsewhere. there is a trade surplus. This relationship is shown in Figure 18. Other factors besides interest rate that affect investment will shift the investment share line. dollar becomes weaker and exchange rate is lower. To understand this. When export increase and import decline. When net export is positive. For example. meaning lesser units of foreign currency will be required to buy 1 USD in the foreign exchange market. When interest rate declines. an investment tax credit will encourage firms and household to invest more. and the investment line shift to the right. if firms’ expectations are negative and full of pessimism. Conversely. Tokyo and other financial centres to take advantage higher interest rate in these countries. When dollar exchange rate becomes weaker or lower. exports will increase and imports will decline. As such. the investment would shift to the left.

consumption. so do aggregate demand. Figure 19: Monetary Policy System 17 . Investment. the new autonomous investment increases income. That is why during recession. we can see that increase money supply reduces interest rates. these components will decline. In Panel A. a lower real interest rate raises real GDP. when interest rate increases. investment and net exports. Panel B shows that lower interest rates encourage investment. So. This could be consumption also. net export and government spending is the sum of real GDP and positively related to it. stimulate and boost national output. investment. and net exports are negatively related to interest rate. Fed will lower interest rate to spur aggregate demand by stimulating consumption. consumption. Figure 19 shows the entire flow how monetary policy affects aggregate demand and it summarizes above analysis into one simple diagram. thus real GDP will decrease as well. When real GDP increase. Panel D shows that monetary policy increases aggregate demand by shifting the AD curve to right from ADo to AD1. Panel C shows that through the multiplier effect.Figure 18: Net exports and Interest rate In nutshell. Conversely.

and income per capita increase. When the country’s productivity improves. retrenched workers by US car markers find it hard to be employed in other sector without being retrained and it takes time to re-train. It continues to exist because layoff workers skills do not match with new requirements of new jobs.3. The supply side policies for labour market focus on improving the supply of labour available in the market. Structural unemployment happened when people are jobless due to capital labour substitution or when there is a recession that created a decline of demand for labour for a long time like now in US. Supply side policy has two sides mainly focus at product markets at one hand and labour market on the other hand.3 Supply side policy Aggregate supply is the sum of all goods and services can be produced b all firms in an economy. This will improve nation’s living standard. This caused occupational immobility. Product markets include all goods and services produced and sold to consumer. without raising the inflation. When the industry productivity improves. This is part of the reason why US unemployment rate is so high since the recession took place and created a recessionary gap (Figure 20). capital and technology. The goal is to increase competition and efficiency. unemployment reduces. Labour market got to be flexible so that matches between supply and demand of labour are easy and fast. thus lowering the risk of structural unemployment. For example. Supply side policy focuses on increasing the growth of potential GDP that is the aggregate supply by improving the factors of production such as labour. firms are able to produce more with lesser input. The improvement will further make firms operate in efficient manner and high productivity. Figure 20: Unemployment Equilibrium (Recessionary Gap) Figure 21: Full Employment Equilibrium 18 . so to improve firm’s productivity in the supply market.

That is why the fiscal stimulus tailored by the government emphasizes improving demand rather than supply so that real GDP could move back to potential GDP (Figure 21). That is why big chunk of the stimulus package of 2009 emphasized on spending over tax cuts as it is the quickest way to create jobs. Now. However. Firms are happy if they can sell more and often eager to offer promotion or sales to clear inventory. both must have income and profit. hence government must reduce unemployment. Here is the logic. subsidies in the form of financial aid or jobless benefits are another type of supply side policy given to the unemployed to boost demand. Firms also get tax refund paid back in 2003 for losses made (Bendavid 2009). supply side policy by itself is not effective. Besides. benefits and credits. This will encourage firms to invest in plants and equipment so that firms could produce more at lower cost. household must spend and business must invest. Besides. From the spending portion. would household spend or save? 19 . there must be enough demand to take up the supply produced. To be effective. To have money to spend and to invest. public transportation improvements. to generate that demand. The golden question is with such aids. a big chunk is dedicated to build infrastructure like bridge and road.Billions of dollars from the stimulus are granted to firms as investment tax credits. To reduce unemployment during recession. and more because these projects will create millions of jobs in the market instantly. firms have lots of excess capacity and more than happy to supply at any price. To have income. high speed rail investment. the stimulus intention emphasize on increasing aggregate demand then increasing supply because during recession period. Business would profit only if household spends. government must create jobs to the unemployed. people needs to be employed.

Collectively. Panel (b) shows Fed purchase bonds resulting in increase demand for bonds and thus raise the bond price. thus the domestic economy. The dollar value continues to decline. if the global economy already in recession. 20 . further stimulating the economy further by rise in exports and decline in imports. the increase in supply of US dollar lowers the value of US dollar. Panel (a) shows economy experience unemployment equilibrium state (recessionary gap) and attempt to close the gap by stimulating the aggregate demand by shifting it to AD2. Figure 22: Monetary .4 External policy Figure 22 shows how exchange rate policy affects aggregate demand through the impact from expansionary monetary policy.3. the dollar will fluctuate based on demand and supply of dollar. This will stimulate the domestic consumption and investment. As US follows flexible exchange rate system. Panel (d) shows that demand for US dollar decline when interest rate falls because dollar assets are less attractive. However. Panel (c) shows the purchase of bonds by Fed increases the money supply in the market and that reduce the interest rates. it shifts the aggregate demand (AD) curve in Panel (a). depreciation of dollar only worsen the recession in those countries by reducing the country’s exports. The lower dollar value makes exports cheaper to foreigners and imports more expensive to Americans. Consequently. It also improves net exports.Exchange Rate to close recessionary gap The impact is even greater when the interest rate hits zero percent during the recession.

thus resulting decline in net exports. resulting it to shift back to AD3. the fall in investment and net exports portion offset the AD increase to AD2. As such the increase demand for US dollar reduces the supply thus resulting making the US dollar appreciates.Figure 23 shows how exchange rate affects aggregate demand through the effects of expansionary fiscal policy. even though both policies were meant to stimulate aggregate demand. 21 . created crowding out effect. Panel (c) shows that increase in government spending shift the AD curve out to AD2 if there are not unfavourable impact on other components of AD such as investment and net exports. Panel (b) shows that higher interest rates makes US dollar more attractive. Panel (a) shows government finance spending by selling more bonds. fiscal policy reduces its own effectiveness by crowding out effect and overall effectiveness of monetary policy. Such effect reduced the success of the policy. The stronger dollar makes exports expensive and import cheaper. thus resulting in lower price of bonds and higher interest rate. Unfortunately. Figure 23: Fiscal Policy and Exchange Rate Based on above analysis.

The inflation rate is at record low. the actual results seen now are not what the policy makers expected. stimulus supported economist rebuff with the reason being the stimulus amount was just not great enough. Unfortunately.4. Even though Fed Chairman Ben Bernanke has gone all out to battle recession by taking extraordinary move to reduce interest rates to basically zero percent with the aim to provide easy credit to everyone especially the housing market. the US economy is still in the slump and there are trillions dollars of monetary excess in the banks in US but no one would borrow it. The question here is whether all these policies are effective in recovering US recession? Can a dollar spend by the government leads to a dollar more or less to GDP? Will the multibillion dollar stimulus package stimulate the economy or just a waste of resources? Figure 24: US GDP Growth Rate It has been a long time great debate on whether fiscal stimulus was the right way to handle recession or monetary policy is fit. Together with Obama’s fiscal stimulus.0 Success Rate Since the recession started in end 2007. the economy continues to weaken. let’s look at some facts here. Since the Great Depression. weak housing 22 . There are no lending activities. the US economy has lost millions of jobs and real GDP has dropped significantly (Figure 24). Conversely. How could there be economic growth if there is no capital lending or borrowing.8 million unemployed people (BLS 2010). Based on the latest report from US Department of Labour. Today. anti-stimulus economist claimed government intervention did not work as the depression took long time before is recovers after stimulus applied. he expected the approach would generate economy recovery by late 2009 and would foresee uninvited inflation in 2010 (Coy 2008). there are 14. The economy does not face liquidity issues but other problems like solvency. Now.

and depressing firms and high unemployment rate. the unemployment rate has risen dramatically after the crisis in 2007 and peaked at 2009 and is still high now (Figure 22). the monetary policy has failed and the fiscal policy has failed in reviving the recession. In my opinion.market. This shows that the multibillions of dollars of stimulus packages by government and the monetary policies intervention by Fed has little impact in improving the labour market in US. Furthermore. Figure 22: US Unemployment Rate Still High 23 . I believe monetary easing is not going to improve any thing.

If the economic variables continue to weaken or shows no improvements. 24 . sees it revenue affected and declined (Fletcher 2010). thus limiting their spending which accounted the biggest part of income for the US economy. Technically. The weak economic growth since recession and record high unemployment rate has tumbled. intimidated and wrecked the nations’ confidence level dramatically. this will lead to economic shock. the world third largest brewer. there could be correction in the stock market when companies’ results or performance continue to go south or demonstrate unsustainable behaviour. Heineken. These actions had further dampened consumer and businesses confidence and also discourage household spending.0 Future Policy for US Economy The biggest problem with US economy now is the negative expectations and shattered confidence level of the nations.5. besides further worsening the nations’ expectations. Household and business saves more for future that is full of uncertainty. Decline in household spending will affect firms business. due to austerity measures and weak consumer confidence in developed countries. to improve the household and business confident and expectation. So. Everyday people are surrounded with bad news focusing on the negative aspects of the recession and the curse of burden of government debt to the future generation. For example. the government should look into how to improve country high unemployment rate. In addition. The expectations include future deflation. For example. Collectively. future incomes and future profits. Such expectations are powerful. the economy continues to stay depressed if the people expects that way. resulting an expectation trap. The Obama administration or the new house who take over from him if he lost in the next election should consider salary tax cuts for few years for massive low to medium income earner who earns less than a certain income threshold and to impose higher income tax to higher income earner who earns high income threshold. contagious and slow down recovery. Higher volatility in sustaining firms’ earnings and profit would lead to investor to be cautious and make them to be risk averse. the economy is out of recession after 18 months and being the longest duration of recession after Great Depression (Matthews 2010) but emotionally I believe they are still in recession. developed nations have started to implement austerity measures to reduce budget deficit by lowering government spending and increase taxes (Stein & Wesbury 2010). Expectations of all perspective of future economic climate and conditions play an important role in reviving the US economy.

car loan. The reason to make it revenue neutral is because we do not want to further enlarge the current budget deficit which is already at high level. we would not risking future consumption of private sector which also supports the economy growth. rental. How would you pay your utility bills. the fiscal cost involve in implementing such plans could be made revenue neutral. This is what the US economy must have now in order to recover from recession because no jobs mean no income to household and limited sales to businesses. Lack of those two means household has limited money to spend and business has limited capital for investment. Imagine no more jobless benefits from the government. Therefore. By doing so. 25 . and house mortgage? If households and businesses do not spend. credit card debt. there will not be economic growth.In this way. the new policy forward has to be revenue neutral should not increase budget deficit and must stimulate the demand for labour.

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