The Economy, Monetary Policy, and Monopolies

The Economy, Monetary Policy, and Monopolies

A Robinson

Principles of Economics 100

May 26, 2012

Analyze the current economic situation in the U.S. as compared to five (5) years ago. Include interest rates, inflation, and unemployment in your analysis. The United States is the most technologically advance country in the world, not to mention the largest. Everywhere you look or read the headlines are saying that the U.S. economy is in a great shape. Is that really the case? There has been a spike in the number of houses being sold; interest rates have hit rock bottom, and a record weakening in the federal budget balance. With all those things taking place within our economy, it is still not where it should be nor is it close to where it needs to be.

The unemployment rate in April of 2007 was 4.5% compared to April of 2012 at an 8.1%. Unemployment rates are high compared to five years ago, but are low compared to 2 years ago. The country has been through a lot trying to build its economic status back to where it was years ago. The unemployment rate is the number of people actively looking for a job. Unemployment is an indicator of how other factors of the economy are doing. For instance, if it looks like the economy is attenuation, and the unemployment rate is increasing, then you know businesses aren’t confident enough to start hiring again, and vice versa. When setting monetary policy, the Federal Reserve uses unemployment to determine the health of the economy.

Monetary Policy is a series of actions that the Federal Reserve uses to affect the level of inflation and Real GDP. If monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long-run capacities, wages and prices will begin to rise at faster rates. The whole idea behind raising or lowering interest rates is to affect the demand for goods and services. Policy affects real interest rates, which affects demand and output, employment, and inflation. In April 2007, the inflation rate was 2.57% compared to 2.30% in April 2012. If a monetary policy is persistent at trying to keep short-term real rates low, will eventually lead to higher nominal interest rates and higher inflation. This will not resort to any permanent increases in the growth of output or decreases in unemployment. Output and employment cannot be set by monetary policy in the long run, even though there is a trade-off between higher inflation and lower unemployment in the short run, that same trade off disappears in the long run.

Propose two (2) strategies that the federal government could implement that would encourage people to spend more money in order to create employment opportunities. This country is built on the American dream, freedom, and education. Everywhere you turn someone is always saying how important an education is and how it will take you in life. That maybe so, but not everyone can afford a quality education and those of us that cannot have to take out loans, federal, personal, etc. in order to obtain that education. So, one strategy that I propose to the federal government would be to forgive student loan debt. Hundreds of thousands of students graduate each year from college with hundreds of thousands of dollars in debt before they even start their career. They have to find a job and immediately start paying back those loans. Think about it, if those debts were forgiven, those hundreds of thousands of dollars could be put back into the economy thus stimulating it. That would lead to more employment opportunities, companies would feel confident enough to start hiring again.

The other strategy that I would propose to help rebuild the economy and create jobs for millions of Americans would be Healthcare. There are so many Americans who cannot afford healthcare, insurance, and medicine that they just go without and hope and pray for the best. Or they just do to the hospital, get the treatment they need, tell them to bill it to them, and then when the bill comes they sit it in a pile with the rest of them. America offers many opportunities that other countries do not, but one thing that it does not offer its people that some other countries do, is free healthcare. Many Americans are indebted with medical bills and just cannot afford to pay them. They may pay a few dollars here or there and that’s all. If the Federal government would offer free healthcare to the American people, so much money could then be put into the economy.

Insurance companies are increasing their premiums and offering less coverage. In 2011, over 25 percent of Americans were living without healthcare coverage. The cost of medical procedures and services has risen and is forcing people to go without medical care. So, if the government comes up with a free or reduce health care plan, a lot of the money being spent on health care can be put into the economy and create jobs for the country.

Identify a situation in the past 50 years in which the government used antitrust policies to stop a monopoly from occurring. Include the circumstances of the proposed monopoly and the reason the government stepped in. Predict what would have occurred had the monopoly succeeded. American Telephone and Telegraph was broken up into seven regional phone companies, in 1982 by the government (O’Sullivan, Perez, Sheffrin, 2010). “AT&T had used its legal monopoly in local telephone service to prevent competition in markets for long distance service and communications equipment (O’Sullivan et al., 2010).” The government stepped in because it wasn’t fair to other companies like MCI and Sprint to not be able to provide long distance services. The battle went on for eight long years and AT&T settled, dividing their company into seven. If the government hadn’t stepped in and the monopoly had succeeded, you wouldn’t have a choice as to what service provider you wanted. There would be no competition and you would have to pay whatever that price is regardless of the service etc.

Propose two (2) methods of identifying groups of customers who should receive a discount for a product or service without alienating consumers. There are different groups of consumers, a student, a senior, or a non-senior etc. Let’s use seniors and non-seniors, for example seniors live on a fixed income for the most part. They can’t afford to spend a lot of money on certain things and often won’t shop at certain places unless they are being offered some sort of discount. Seniors also tend to be more frugal than non-seniors. So, in order for companies to gain the business of seniors they offer them an extra discount or a certain day during the month where they can get a discount. Companies can also set up focus groups to help them determine which group of people in their area would make their business more profitable by offering some sort of discount,

Suggest three (3) reasons a monopoly may or may not be efficient in any economy. A monopoly is a single firm that serves an entire market (O’Sullivan et al., 2010). In today’s economy people like choices, they want to be able to make their own decisions about the television they purchase, or the phone service they use, or whether they want cable or satellite. With that being said, one reason a monopoly won’t be efficient is because it doesn’t allow for decision making. On the other hand, it is good that the government will limit the number of firms. People do like choices, but they don’t like too many choices, that make’s the decision really hard. Monopolies can charge higher prices than a competitive market, they benefit from diseconomies of scale, and they can use their monopoly profits to invest in research and development and have resources for if the firm flops.

It is difficult for the government to break up monopolies so they tolerate it. They can however implement regulation of monopolies. Monopolies can be more efficient because of the advantages from economies of scale. For firms operating in a natural monopoly, this is very important. Just because a firm has monopoly power doesn’t mean they are bad. Google, for instance has monopoly power over search engines, yet they are very innovative and efficient.

Works Cited

Current Inflation. Retrieved From: http://inflationdata.com/inflation/inflation_rate/currentinflation.asp

Labor Force Statistics from the Current Population Survey: Retrieved From:

http://data.bls.gov/pdq/SurveyOutputServlet

O’Sullivan, Arthur, Perez J., Stephen, Sheffrin M., Steven (2010). Survey of Economics:

Principles, Applications, and Tools. Boston, MA: Pearson Learning Solutions

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Cited: Current Inflation. Retrieved From: http://inflationdata.com/inflation/inflation_rate/currentinflation.asp Labor Force Statistics from the Current Population Survey: Retrieved From: http://data.bls.gov/pdq/SurveyOutputServlet O’Sullivan, Arthur, Perez J., Stephen, Sheffrin M., Steven (2010). Survey of Economics: Principles, Applications, and Tools. Boston, MA: Pearson Learning Solutions ----------------------- 1