Monetary/Fiscal Policy

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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.

Inflation

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 future.

Where does Alan Greenspan, chairman of the Federal Reserve, stand on inflation? As indicated...
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