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Essay/Term paper: Monetary/fiscal policy

Essay, term paper, research paper:  Economics

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Monetary/Fiscal Policy

Government monetary and fiscal policies change all the time. These policies are
installed or fixed for the betterment of trade, inflation, unemployment, the
budget, or many other economic factors. In my opinion, it seems like two people
have the majority of the control when it comes to forming these policies. The
first person who influences these policies is President Bill Clinton who
proposes tax cuts, to balance the budget (Clinton's budget proposal should be
given to congress soon), minimum wage increases, or other legislation to improve
the economy. The second person who influences policy is the Federal Reserve
Board Chairman Alan Greenspan who can truly destroy our economy by a slight
miscalculation. Greenspan is so influential that the mere speculation of his
making a move can cause panic buying or selling in the open markets. Alan
Greenspan has the power to increase or decrease the money supply by changing
reserve requirements, by changing the discount rate, or by buying or selling U.S.
Securities over the open market.

The major governmental problem is trying to balance the budget. The United
States government is currently in debt $5,262,697,717,000 as of February 7. This
number grows about $10,000 per second(see charts 2,3,and 7). President Clinton,
Chairman Greenspan, and Congress are all working towards a balanced budget by
the year 2002. As many economists explain , the need is for legislation to keep
the budget balanced for years to come and not look for a quick fix to balance
the budget for only a few months to quiet critics. The government takes steps
constantly to balance the budget; economists say that the chances of inking a
deal this year are better than ever.

President Clinton has currently proposed an offer of $100 billion in tax cuts
through 2002. These cuts are aimed at giving relief to middle class citizens.
A few of his other proposals include: $500.00 child tax credit, tax deduction
for post high school education, increasing the limits of individual retirement
accounts, and elimination of the capital gains tax. Despite these cuts, he
still believes a balanced budget will be achieved by the year 2002.

Greenspan, in an effort to shave billions of dollars off the deficit, explained
to Congress that they are overpaying Social Security recipients. Greenspan's
testimony sets the stage to successfully balance the budget. His reasoning
behind these allegations is that the cost of living is overstated and he is
urging Congress to correct the problem which would affect inflation, gross
national product, and the budget.


The fourth quarter results have been calculated and the economy is in great
shape. The Commerce Department released fourth quarter numbers which show a
4.7% annual growth rate and a 1.8% rise in inflation. This 1.8% fourth quarter
rate is lower than the 2.1% third quarter rate. The gain in the fourth quarter
is due to higher exports and higher consumer spending. The fact of the matter
is that 1996 ended with strong growth and no problem with inflation(see chart 6).

Many economists showed concern over steady inflation growth and are worried
about 1997. They believe investors may be tricked because the economy is really
hot and it is just a facade. Many are concerned that the impressive growth in
1997 could start a dangerous domino effect that could push up inflation.

Demand and production are very strong which is always a good point for economic
growth. Many retailers moaned about a slower Christmas buying season but
consumer spending showed a rise of 3.4%. Many analysts expected unfortunate
product overloads. It does not look like businesses will be stuck trying to
clear out their stock rooms. As for 1997, I get mixed reactions. Many
investors seem split about their predictions and are not too sure about the

Where does Alan Greenspan, chairman of the Federal Reserve, stand on inflation?
As indicated earlier in this report, a few weeks ago, he urged Congress to
revamp the method by which the government measures inflation. He believes that
the consumer price index overweighs inflation by approximately one percent per
year. He pointed out that the cost of living increases are overstated and urged
politicians to appoint a commission to correct the problem.

Gross National Product

The gross national product is a measure of the market value of goods and
services produced during a specific time period. The GNP is the most widely
used factor of economic performance. GNP are estimates that are prepared after
each quarter. The GNP estimate after the fourth quarter in 1996 was
. GNP can be calculated by adding the total cost of supplying the goods and
services, including the income of the producer.

An average breakup of Real GNP can be divided as such: 64.5% from consumption of
goods and services, 19.8% from government purchases, 16.6% from gross investment,
and -0.9% from net exports. It is tough to keep up with technology and the
products that consumers spend their money buying. It is tough to tell if the
consumer has the money to buy luxury items or necessities, but there are many
goods and services from here and abroad that are readily available and worth
looking into.

Domestic demand is rebounding and even foreign demand is picking up for our
products. Many manufacturers are feeling the pressure in their order books.
Unfilled orders and consumer demand are increasing and forcing producers to
lengthen their workweeks; increase their payrolls, and speed up production.
Overall orders so far as the fourth quarter can tell are well above their third
quarter average. Orders for capital goods are high as well as durable goods,
which include long-lasting items like air-conditioners, microwaves, stoves, and
airplanes. This rebound is why the new year looks to be promising. Consumers
have a to do with the manufacturing upbeat look.

Despite the majority of products being goods and services, Government spending
also makes up a large part of our GNP. Military is a major spender and with the
competition over B-2 bombers, money is being exchanged in large amounts.
President Clinton is also expected to propose a 20% increase in spending for
education which would raise the total to some $51 billion. Other examples of
Government spending which will be addressed in Clinton's Budget for 1997 will be
International Affairs, Transportation, and Medicare(to name a few).

The prospect of stronger world growth clearly is a plus for exports, especially
capital goods. Foreign sales of capital goods have risen 10.4% from a year ago.
Cheaper exports means cheaper imports will allow foreign goods producers to
expand their already record share of the U.S. market.


The unemployment report is released periodically and it contained a big surprise
for many economists in 1996. Over the past months the reports showed the economy
doing quite well. This economy has been doing so well that some economists were
worried about reaching full employment rather quickly. Although the jobless
would love that to happen, full employment would lead to high inflation and
destruction of the economy. The consensus on Wall Street was that the Fed would
have to raise rates until word got around about the report. By day's end, the
mainstream were afraid of an economy that will grow so slowly that rates will
have to go lower.

The current unemployment rate is 5.3%. President Clinton is trying to create new
jobs to get everyone earning real wages. People want to know that he is opening
job opportunities but he also does not want full employment. This is a prime
example of politics. Tell people what they want to hear but do not let the
economy stagnate. I guess that is his hidden agenda. In effect, Clinton plans
to strengthen employment and business investments in poverty stricken urban
areas. He plans to triple funds to lend to city banks in order to foster
economic development in poor neighborhoods. He will also try to triple
employment in public housing projects through a $10 million project involving
HUD, Rockefeller Foundation, and Chase Manhattan.

Many Southern states, seven to be exact, are about to cut their unemployment
insurance taxes by hundreds of millions of dollars. The Southern economy has
seen tremendous growth and people are forgetting the bad economic times. The
region has also been adding jobs at a constant pace. Unemployment has dropped
to record lows in some of these states. This risky act may spell disaster.

New Happenings

President Clinton sent his opening proposal to congress in his attempt to
balance the budget by 2002. Economists say Clinton is right on track with his
proposals. Areas that are being hit hard are: Medicare, Defense, and Welfare
(check chart one for breakdown). Also new, the unemployment breakdown came out
and the economy has not lost a step. Despite the unemployment rate increasing
from 5.2% to 5.3%, there is no fear of inflation. Payrolls also showed growth
while the labor force expanded and the workers' hours decreased.


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