GEBFinal - Ryan Petteruti RAP07c Perspectives on Free...

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Ryan Petteruti- RAP07c Perspectives on Free Enterprise- GEB4455 Exam #2 1A. Generally, it is accepted that a moderate 2.5%-3.5% growth in GDP will provide for a stable economy (Ryan Barnes-Investopedia), meaning that companies will profit, unemployment will stay low and inflation won’t get out of hand. With the economy still trying to recover from its current stages, I believe economic growth for next year (2011) will continue its below average pace in the 2.4%-2.5% range, despite optimistic view points. My beliefs are well backed by a survey conducted by the Associated Press. According to the survey, many economists believe that the current 9.5% unemployment rate will remain through the beginning of next year and won’t return to its “historical normal rate” of 5%. These predictions are due to a variety of factors including the end of the homebuyer tax credit that boosted sales earlier in the year and low consumer spending and high saving despite historically low borrowing costs. The survey discovered that “Americans saved 4.2% of their disposable income last year, the highest level since 1998 (Associated Press).” This rate is expected to remain steady through 2011. These statistics help explain why growth of less than 3% is predicted and why unemployment is expected to remain at a high level. In order to keep up with the population increase, sustained growth of at least 3% is required to create enough jobs. State and local governments have also dramatically cut their spending at a rate of 3.8%, the biggest decline since 1981 (a year in which the economy went into a deep recession). These declines in state and local spending take away jobs and affect the economy on a larger scale, ultimately driving consumers to spend less. To prove this theory, state and local government cutbacks decreased the U.S. GDP by half a percentage point in the first quarter of 2010. These statistics and low consumer *Sources and references: Kurtis Hemmerling (Suite101.com), Joseph Lazzaro (Daily Finance.com), Michael Schuman (Time Magazine), Ryan Barned (Investopedia), Warren Buffet, Steven Englander (Time Magazine) Ayn Rand (Atlas Shrugged), Milton Friedman (A Free Enterprise System), Associated Press, Wisegeek.com
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confidence provide more than ample evidence to prove that the economy shows no signs of increased growth in the short-term future. B. I believe that inflation is more of a risk than deflation in the upcoming 2011. Using the Consumer Expenditures Price Index to measure inflation levels, the Fed forecasts 2011 levels to rise to 1.5%. The Fed’s recent decision to buy an additional 600 billion dollars’ worth of government bonds in order to stimulate the economy worries many economists because of the long-run inflation risks associated with the acquisition. Their intended result is to encourage banks to lend more money with their increased reserves due to quantitative easing. But an unintended consequence of the Fed using high-powered money to buy these bonds, prices end up escalating at a fast rate in order to keep pace with the surplus of currency (also known as a demand-pull).
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