(a) How successful have the American Government and the U.S. Federal Essay - 1

(a) How successful have the American Government and the U.S. Federal Reserve been in running the American economy over the last - Essay Example Two years later, the economy is improving but remains volatile (Anderson, 2008). This paper identifies self correcting mechanism within the economy that could help stabilize the economy. Moreover, this paper describes fiscal policy that can be used by the government to help mitigate the impact of the recession. The middle class continues to shrink as the gap between the rich and the poor continues to widen. These are all signs of a recessive gap in the economy (Anderson, 2008). Although the U.S. economy has bounced back, it has yet to reach equilibrium and still runs on a large budget deficit. This paper will analyze key market indicators before identifying if the response by the American Government and the Federal Reserve was sufficient. The first key indicator of the economy is the consumer price index. The CPI is a measure in the changes of price levels of consumer goods and services purchased per capita (Zeleny, 2011). The CPI measure the prices of the market basket of goods that are most sold and utilized by consumers. The graph below is an illustration of the 2011 Consumer Price index from the Bureau of Labor Statistics. On average, this graph indicates that prices rose across the board. This could be an indicator of increasing interest rates. When the dollar is devalued, businesses tend to increase their prices. This graph specifically focuses on the major foods and beverages which are a part of the primary market basket items. While prices have risen for the most part, the efforts taken by the government and the Federal Reserve have softened the impact of the recession (Anderson, 2008). In terms of the economy, Adam Smith proposed the theory of the â€Å"invisible hand in his work entitled â€Å"The Wealth of Nations†. In this book, Smith proposed that a capitalist economy is guided by an invisible hand that self corrects for both inflationary and recessionary gaps (Hodgson, 2007). Specifically, a recessionary gap indicates that all available re sources are not being utilized. That is to say that the economy is operating below its most optimal level and is consequentially inefficient. In order to correct for this, the short-term aggregate supply curve must move to the right gradually towards equilibrium because of the underutilization of labor. This means that unemployment rates are higher than the actual percentage. The consequence of this is that the cost of labor is driven down, which increases access to employment. If the government deems it necessary to intervene in the economy then they are likely to utilize fiscal policy to correct recessionary gaps. Fiscal policy is primarily accessed through the use of taxation and government spending. The government can increase the amount of disposable income for individuals by decreasing taxes. This in turn increases consumer spending which is a factor in calculating the GDP. If consumers are able to consume more, that means that producers are able to sell more goods which could in turn lead to the creation of more jobs. Another action the government can take is the increase of transfer payments. Individuals receiving transfer payments will have more disposable income which means they will consume more goods (Hodgson, 2007). Business confidence is another factor indicating that the economy is showing signs of survival. A program that was recently implement was Cash for