This article reports that the administration is claiming the U.S. will not enter a recession in 2008. The rationale would be that the Fed lowering interest rates (meaning that money stocks are increasing), combined with the fiscal stimulus (the tax rebates, or T falling) will be sufficient to keep output from falling.
If you review this article, think of it in terms of our IS/LM model. How does the combination of increasing M and lower T shift around the curves and keep output up? What will actually happen to interest rates? Can we know for sure?
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The article by James Politi chronicles the Bush administration’s denial of a recession and many top economists disagreement with the administrations diagnosis. On Monday, the administration forecasted slower growth but not a recession. It also commented that the economy was stable enough to make it through the current mortgage crisis we are experiencing. However, many of the nation’s top economists say that a recession is imminent and that a mild contraction is currently taking place. Steven Wieting, Managing Director of Economic and Market Analysis for Citi group released a note on Monday saying: “Most data suggest a mild contraction is under way in the US economy as 2008 begins. At some point, recession will not be a source of ‘surprise’ or a hypothetical.” President Bush mentions “heightened risks to our near-term growth” and a period of uncertainty”, but never mentions a recession.
President Bush has signed legislation that calls for a $170 billion economic stimulus package through tax rebates and business incentives. I’m not quite sure about the type of business incentives so I will not be able to comment on them. The overall effectiveness of the tax rebates all depends on the slope of the LM curve. If the curve is steep then the effect on output will be minimal. If it is flatter we should see a larger increase in output along with a small increase in rates. I think this would be a good short-term economic fix to get us through the mortgage crisis as long as Americans spend the additional money that they are going to receive and that all depends on the marginal propensity to consume.
I just read that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are saying that the rate cuts and rebate checks will keep us out of a recession. They said, however, that the economy is looking at lower-than-expected growth. They are now predicting a 1.8% increase which is lower than the most recent estimate of 2.7%. Not all senators in the Banking Committee agreed with Paulson and Bernanke. Some said that even if everyone spent their rebate check that the effect would be minimal. I guess we will have to wait and see who’s right. I’m still new to the study of economics, but I believe that the economy will rebound. I have no idea when, but I would hope that our country has enough skilled policy makers to take care of the task as soon as possible.
Blutarsky
The article basicaly says that there is no forecasted 2008 recession. The government passed a $170bn stimulus package that is supposed to inject more money into the economy. If there is a tug on the economy, it is caused by slowed growth. According to the article, "top economists" think otherwise.
This can be explained by the IS/LM model. Injecting $170bn into the economy will affect consumer savings which are illustrated in the Loanable Funds Market. The stimulus can be considered as a decrease in taxes (T) which causes savings to decrease according to the formula S=Y(1-MPC)+MPC(T)-G. As savings decrease, the interest rate (r) in the Loanable Funds Market increases. When this movement is transfered to the IS/LM model, the resulting change is an outward shift of the IS curve.
The amount by which interest and income actually change when the IS curve shifts outward depends on the steepness of the LM curve. If the LM curve is steep, then the interest rates will increase by alot compared to income(y). If the LM curve is flat, then the IS curve shift will result in a small increase in interest rates when compared to income(y). The point here is that interest rates will go UP regardless of the steepness of the slope.
If the FED wants to return the interest rate back down to their original level, than it can do so by adjusting the money supply (M). In this case, the FED would want to increase the money supply so that the economy gets stimulated. More people will invest and the interest rates in the money market will fall. The movement in the money market would be reflected as a downward shift of the LM curve in the IS/LM model. this would result in a decrease in interest rates (closer to their original level), but an increase in output. The amount of the effect would depend on the slope of the IS curve. If the curve is steep, then the change will have a small effect on output. If the slope of the IS curve is flat, then the change will cause a big effect on output.
In order to truly know what will happen to the interest rates, we must know the slopes of the IS curve and the LM curve. They will dictate the effects of the actions taken by the FED and the Government.
Amid fears of a recession in the near future for the United States, this article states that the White House isn’t concerned about a recession, as it is “unlikely” for 2008 and 2009. The Bush administration are only expecting slower growth in the economy, as an effect of the “challenges” and “economic uncertainty” that it is facing. GDP growth is estimated to be 2.7% for 2008, and 3% for 2009, as predicted by the White House.
President Bush signed a legislation this week on March 5, 2008 that is intended to stimulate our economy by later this year. The package consists of $170 billion through tax rebates and business incentives, which were thrown together by Congress in only six weeks. This stimulus package, along with the effects of January’s 125 basis point easing of monetary policy by the Fed, should begin to kick in during the later half of 2008.
Of course, many economists believe this effort may be in vein. They are certain that the US is not only experiencing a slowdown. Steven Wieting, an economist for Citigroup, says, “Most data suggest a mild contraction is under way in the US economy as 2008 begins. At some point, recession will not be a source of ‘surprise’ or a hypothetical.”
So then what impact will this have on the IS/LM model? The stimulus package will show up as a decrease in taxes (T) which leads to a decrease in savings, in this formula: S=Y(1-MPC)+MPC(T)-G. The interest rate in the Loanable Funds will market will increase then. That movement will show up in the IS/LM model as the IS curve shifting outward. As for the effects of the tax rebate on how the interest and income actually change, we must know the slope or steepness of the LM curve. The more steep the LM curve is, the less output will be affected, but more of an effect on interest as the IS curve shifts. As for a flatter LM curve, it would obviously be the other way around. Having that said, interest rates will go up regardless of the steepness of the LM curve. If the Fed wants to return the interest rate to its original position, then they should increase the money supply, thus bringing more investment and causing the interest rate to fall.
Later this week, the chairman of the Federal Reserve Ben Bernanke is scheduled to testify before the Senate at a hearing that “could offer clues on whether the US central bank will continue to cut interest rates aggressively to tackle the economic slowdown.”
This article begins by stating that the Bush administration is continuing to stick with its prediction that the United Stated will not enter into a recession in 2008. The reason why they are standing behind this view is that they claim that the United States economy has a “solid foundation” which will allow it to pass though this housing crisis without coming into a recession. The Bush administration feels that the stimulus package offered this year would aid the economy and keep their predictions accurate. Advisors do admit that the United States is experiencing slower growth right now, but we are not in a recession nor will we enter one this year.
President Bush urges that the American people remain “confident about long –term strength of our economy.” The president believes that we are now experiencing a time of uncertainty and due to this uncertainty, “there are heightened risks to our near-term economic growth.” Many steps are being taken to insure the American people that everything is being done to dodge a recession. These actions include Ben Bernanke and Fed making the decision for the US central bank to continue to make major cuts to the interest rates to minimize the economic slowdown.
If we take a look at this through our IS/LM model, we can see that the implementation of the stimulus package will effect our Loanable Funds market. This stimulus acts a decrease in taxes for Americans. If taxes decrease, savings also decrease, and the interest rate is increases. When we look at the effect this has on the IS/LM graph, we see that the movement of the IS curve results in an increase in output. The slope of the LM curve can display the full affect of this change. The fed is also cutting interest rates at the same time so that they can attempt to keep people spending their money and stimulating the United States’ economy. The Fed can do this by buying or selling bonds to lower or raise the money supply. Right now, the Fed would want to buy bonds in order to raise the money supply. In the Money Market, this shifts the Money supply to the right, resulting in lower interest rates and higher output on the IS/LM graph. I believe that this is exactly what the Fed and the Bush administration are hoping for with everything they are doing in order to keep the country out of a recession.
This article in the Financial Times discusses the belief of economists in the white house that the world is not currently heading into a recession and that they maintain the belief that the 170 billion dollar fiscal stimulus package will be sufficient to prevent economic downturn. This belief is in disagreement with the view held by prestigious economists that the economy is already beginning to contract in addition to the current collapse of the sub prime mortgage market. The white house maintains its belief that the economy will grow an additional 2.7% this year and a further 3% in 2009.
The article also goes on to further report that President Bush will likely sign into law the above mentioned tax cut very soon and that its injection of money to consumers and incentives to small businesses will be sufficient. The benefits of the package were agreed to by congress in 6 weeks and are expected to be implemented by the second half of 2008.
Ben Bernanke, chairman of the Fed, and Treasury Secretary Hank Paulson are scheduled to testify before the senate regarding the current economic situation.
My reaction to this article is mostly apathy. The opinions of the Bush administration are more political than economic and are merely maneuvering for future political capital as well as a way of being viewed as hopeful and productive during a time of economic uncertainty. The upside is that a positive outlook, if widely accepted, can sometimes be enough to turn a market around.
In this article James Politi reports that the White House claims that it US is not in danger of entering a recession this year. The Bush administration stated that the economy is stable and that it will be able to get pass the housing crisis. The chairman of the White House Council of Economic Advisers, Edward Lazear, stated that, the US is not in a recession and that the economy does not even suggests it will be entering a recession, and that the economy is simply growing slowly. However, many economists believe that Lazear is wrong and that the US is looking at a possible recession do to unemployment and especially the housing crisis. Yet “the Bush administration predicts the US economy will grow at a rate of 2.7 percent this year.” Politi then describes the 170 billion dollar stimulus that President Bush and Congress have passed. This stimulus is said to help boost the economy by sending out tax rebates to consumers so that they can put it back into the economy. Bush advised Americans that they should be self-assured that the US economy is strong and that the economy is just going through a “period of uncertainty”. Still, there are economists who disagree and are certain that the US will enter a recession this year.
The article points out that there will be a fiscal stimulus which will cause taxes to fall. Looking at the IS/LM model when taxes are lowered it affects the IS curve. The tax rebates will cause savings to decrease so the IS curve shifts up. This shift in the IS curve shows that interest rates go up and output does too. Therefore the tax stimulus will help improve the economy.
In response to this article I believe that the Bush administration is saying that there is no threat to enter a recession just to keep the American people calm. However, if the economy was in a solid state then there would be no need for the tax rebates that are being issued. Even if the rebates are issued then there is no way of knowing whether or not consumers are going to go out and spend the money they receive. If people decide not to spend the money then Bush’s plan will not work because the money will not be put back into the economy. Yet there is no real way of knowing this so there is a chance that the tax stimulus will benefit the economy.
grandslam
The Bush administration may say all they want that the AMerican economy is not in any danger of going into any sort of recession in fact they say that the econmy is in a solid state and should stay that way for a long time. I have to disagree with that statement, first of all a recession is when output is decreased, unemployment rate goes up and not to mention the housing crisis we have been facing the last year.
But white house economic spokesman says that we are just experiencing a slower growth than usual and that we should not expect a recession.
Even several economists say that the white house spokesman is wrong and that we are experiencing a mild recession. But I also have to say that if the government does not think that we are not going to experience a recession then why did the Fed lower the interest rate and the government issue tax rebates. In fact, there has been talks of the government issuing a second rebate and the Fed lowering the interest rate even more if the economy continue the trend it has been on
grandslam
In this article James Politi reviews the current views of the Bush administration and those of other well known economists on the current state of the United States’ economic development. The Bush administration is reluctant to admit any recession is taking place and is instead, as Mr. Edward Lazears has said, is taking the position of a “slower growth” period for 2008. While on the other hand top economists studying the recent unemployment rates, business sentiment and mortgage industry have a differing opinion. Steven Wieting, Managing Director of Economic and Market Analysis for Citi group, has the belief that the recession is not something that is just hypothetical but rather a fate we are soon to encounter. The Bush Administration is planning to subvert this recession with a $170bn boost stimulus package that is soon to be passed by congress. Results are expected to be seen by the second half of 2008. Bush urges the American public to be confident in the strength of our economy and to be understanding of the high risks that are associated with our ‘near-term” growth.
Relating this back to what we have studied in class and using the IS/LM model we can see somewhat fuzzy conclusions about what will happen to the economy if the money supply keeps growing and taxes keep getting cut. The $170bn stimulus will, in the money market, shift the money supply/price ratio out and will in turn reduce the interest rate. Which is what the economy is currently experiencing, a period of low interest. This shift in the money market can be applied to the IS/LM curve. The since there is more money in the economy the LM curve will shift outward. This outward shift of the LM curve will now intersect with a new point on the IS curve which will have a corresponding lower exchange rate. The upside to the lower exchange rate is that output(y) will be projected to increase from the increased exports which coincide with lower exchange rates. I think this is the plan of the Bush administration. This $170bn stimulus can also be considered a tax cut and in the Loanable Funds model this would reduce Savings(s) and thus push the S-I( r) curve inward. This inward shift would then increase the interest rate, something the FED is trying to prevent. In the IS/LM model this shift in the IS curve would further increase output and decrease the exchange rate. This is an overall good plan on paper but I wonder how much depreciation in the exchange rate the economy will be able to handle?
-Matt M-0441909
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