Foundations of Economics For Finance FR1001 Essay

Foundations of Economics For Finance FR1001 - Essay Example Governments are controlling the fiscal policy to stabilize and maintain the flow of the economy. This way, a country can achieve economic stability and growth. In United States, the government controls the fiscal and monetary policy in order to achieve a good economic development. Economy is good in case of low unemployment rate, low fiscal deficit, controlled inflation rate, high gross domestic product (GDP), maintained exchange rate, high export and low import of goods, balanced cash inflows and outflows, and a good investment portfolio. Based on the graph below, the US output gap between the early 1980s up to the last quarter of 1984 and 2001 to 2006 is negative. The worst recent output gap of US was back in 2003 when they have reached negative 1.1. With the proper use of fiscal and monetary policy, despite the Asian crisis in 1997, the US was able to control inflation rate and the fluctuation of exchange rates. The control of inflation resulted to a more stabilized prices and economic growth. The negative output gap is most likely to be the after effect of the high inflation and interest crisis in 1980s, Mexican crisis in 1994 and globalization in year 2000 onwards whereby many of the US businessmen started to cut on their operational costs by subcontracting most of their needed services from the skilled workers from developing countries. The US is aiming to reach a zero output gap by year 2008. (IMF, 2007) Since most of these businessmen are downsizing their businesses in US back in the early twentieth century, many of the US local citizens were affected by mass lay-offs. Some companies even had to declare bankruptcy because of the tight competition coming from the global markets. The increase in the unemployment rate affects the consumer spending in the long-run. This is the main reason why the real domestic output of the US has been constantly declining since 1999. (See Table 1 below) Notice that the graph above indicates that