For the next 12 months, what potential shocks would cause you to change your for
ID: 1209251 • Letter: F
Question
For the next 12 months, what potential shocks would cause you to change your forecasts and how would the shock affect your forecast (e.g., suppose oil prices jump-, what happens to your forecasts)? This part will determine 45% of your grade on this project. Based on the current data, your analysis of the current data and your forecast of the economy over the next 12 months, determine the following policies: Should the Fed increase, decrease, or hold constant the fed funds rate? Why? Should fiscal policy-makers cut taxes or raise taxes? Why? Should fiscal policy-makers reduce defense and non-defense spending or increase defense and non-defense spending? Why? Submit your macro-economic report via email to mffunk@ualr.edu.Explanation / Answer
There are following potential shocks that can change the forecast.
a. Bubble burst in any economy that is trading actively across the globe
It can bring the recessionary effect that will cause a downgrade to economic forecast.
b. Increase in oil prices
It will increase the inflation that will further reduce the purchasing power. Thus, disposable income will be further wiped out.
c. Government default in any major nations
It will reduce the investor confidence that is not good for any economy in an era of globalization. Its impact will also be felt in US economy.
d. Selling of US treasury bills by any foreign government
It shows a lack of confidence in US economy by a foreign country. It can be a retaliation also by any other nation in response to US policies.
Make Policy
1.
Fed should hold Fed fund rate to be constant as it is already up to 0 percent and it cannot be negative. Holding Fed rate to this level is very important to stabilize the recovery process of the economy. It has started showing the growth signs and it needs the favorable initiatives to be taken up by Federal reserve.
2.
Policy makers should cut tax so that consumer spending increases. To meet this increased demand, production activities also gather pace that creates new employment opportunities and economy moves towards growth and development.
3.
Fiscal policy makers should reduce defense spending and increase nondefense spending. It will reduce or contain the fiscal deficit and revenues collected will be spent on important sectors such as education and health care.