After some stupid comments about each other, the leaders of Middle East start a
ID: 1124846 • Letter: A
Question
After some stupid comments about each other, the leaders of Middle East start a war between their countries. They start bombing each other’s industrial zones for more than a month without any ceasefire destroying 90% of each other’s capacity. United States and European Union start feeling war effects in their respective economies. United States does not partake in the war. It’s January 2018 and the latest available economic growth data are second quarter and third quarter growth rates respectively at 3.1 and 3.3 percent. Unemployment has gone down to 4 percent. Fed increased the federal funds rate target in December 2017 to 1.25-1.50% and announced at least four more rounds of interest rate increases in 2018. The national debt has crippled to $20.5 trillion. The Congress just passed a tax reform in December lowering corporate and income taxes. You are an adviser to the White House. The President asks you to do a report about the war effects on US (what exactly has happened, why everybody is complaining), and what measures could be taken, including monetary and/or fiscal policies. In the end of the memo, the President has written in handwriting: “Please include advantages and disadvantages of all possible options. Your advice is appreciated.”
Explanation / Answer
United States
The available economic growth data for second quarter and third quarter growth rates are at 3.1 and 3.3 percent. Unemployment has gone down to 4 percent. Fed increased the federal funds rate target in December 2017 to 1.25-1.50% and announced at least four more rounds of interest rate increases in 2018.The national debt has crippled to $20.5 trillion. Tax reform for lowering corporate and income taxes.
The unemployemnt rate has gone down. This means that the aggregate demand of the economy should ideally go up. The increase in interest rate is a policy which is increasing the cost of capital for the people and impact the disposable income negatively. The debt has gone up to $20.5 trillion which means that the country has to keep a check on the spendings and boost the growth and production in order to reduce the national debt. The govt. revenue can be increased by increasing the corporate and individual taxes of the economy. This will help increase the revenues for the govt. The increase in the taxes might see a lot of protests because nobody likes paying taxes and this might create the cost of production and increase the prices of the goods leading to an inflation. The govt also might try to reduce the imports and encourage the domestic and local market to produce those goods. This way money which is spent on tariffs wi be saved and the debt will be stabilised.