Essay: Economics A) I View the Current Unemployment

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Economics

a) I view the current unemployment rate of 10% as being higher than the natural rate. Unemployment rose rapidly as the result of expectations of a slowdown and economic contraction, rather than as a return to equilibrium. Unemployment in the U.S. has held in a relatively stable range between 4-6% since the early 1990s (Google.com, 2010). The increase to 10% represents an outlier created by unusual economic conditions.

b) The Phillips curve has showed to hold in the short run, so in the short run the government could trade inflation for less unemployment. The current Fed policy is to hold down interest rates to stimulate growth. This will bring inflationary pressure on the economy, but it will also create jobs. If rates were increased now, heading off potential inflation, that would halt growth. Unemployment lags growth, however, so the government needs to make the inflation trade-off in order to reduce unemployment. The stimulus served its purpose. The deficit is less a problem of stimulus than of unfunded liabilities left over from the previous administration. Any further stimulus at this point, however, would be wasteful spending. The economy is beginning to grow again and will bring about employment gains. Further stimulus at this point would not likely lead to gains - at least not those that are worth the cost in deficit. The large deficit is a concern, but can be managed with strong economic growth and containment of key costs -- and these are defense, Medicare and Social Security, not one-time stimulus. Ongoing stimulus would represent another unfunded liability, which would be a strong negative for the country's debt situation. At present, however, the debt is manageable and given strong growth will remain so.

2. a) A global currency would essentially a basket of currencies. There would be inherent problems just in creating such a currency. Some of the world's emerging economies have currencies that are either unstable or are pegged to the dollar. As the recent troubles in the Eurozone indicate, such a currency would be difficult to sustain as stronger, more stable regimes would be forced to bail out weaker one. The political will and broad-based fiscal controls necessary to implement such a currency would be difficult to maintain. If there is a good rationale for such a proposal, it is that stability of global trade could be improved by switching to such a basket.

b) One positive consequence for such a move is that the U.S. would see less demand for the dollar,… [END OF PREVIEW]

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