econ pape[1][1] - Period 8 June 2, 2006 Where are we? Many...

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Period 8 June 2, 2006 Where are we? Many people believe the economy of the United States is like a box of chocolates: you never know what you are going to get. However, economic indicators can help economists gauge where the economy currently is and predict what it will do in the future. Four strong economic indicators are the unemployment rate, which is decreasing, the consumer price index, which is increasing, the gross domestic product, which is increasing, and producer price index, which is increasing. In addition to these indicators, the Federal Reserve controls the monetary policy in the United States. The Federal Reserve has been consistently increasing the federal funds reserve rate, suggesting they are implementing contractionary policy to combat inflation. The fiscal policy has been to generally cut taxes, an inflationary policy. World events such as the War in Iraq have increased aggregate demand. The decreasing unemployment rate, increasing consumer price index, increasing gross domestic product, increasing producer price index, increasing federal funds rate and the War in Iraq all indicate the economy is in an inflationary period. The previous recession in the early 2000’s indicates that we are currently in a recovery. The unemployment rate in the United States is currently decreasing. The unemployment rate is the proportion of the civilian labor force 16 years or older that is actively seeking employment, but is unemployed and not engaged in the production of goods and services [AmosWEB]. The Phillips curve suggests an inverse relationship between the unemployment rate and inflation, so a low unemployment rate creates the problem of inflation while high unemployment has the opposite effect. aggregate demand
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The graph below shows the economy producing at a point beyond full employment, creating an inflationary gap. If the unemployment rate continues to decrease, in six months it will go below target, which is unsustainable in the long run because the economy is producing beyond full employment. This creates high inflation. The target
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econ pape[1][1] - Period 8 June 2, 2006 Where are we? Many...

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