Inflation and Unemployment
- If the country’s labor force numbers 10,000,000 people, and 7,000,000 are employed, the state has 3,000,000 unemployed laborers. As such, the unemployment rate, which is equal to the number of unemployed people divided by the size of the labor force and multiplied by 100%, can be calculated and is 30%.
- Inflation and unemployment tend to correlate inversely, with increases in the former leading to decreases in the latter and vice versa. Low unemployment leads to employers valuing the available workers more and increasing wages to retain their current staff and attract new people. The increase in average earnings leads to higher inflation as prices adjust to the new level. On the other hand, high unemployment means companies are either unwilling or unable to hire additional staff. They lack the incentive or the resources to increase the employees’ salaries, and inflation is low as a result of the lack of reasons for prices to rise.
- The two policies that can influence the economy are fiscal and monetary policies. The former determines taxes as well as spending by the executive and legislative branches of the government. Lower taxes and higher government spending tend to accelerate the economic situation, and opposite measures have a damping effect on activity. The latter affects the money supply and interest rates set by the Federal Reserve, both of which can be adjusted to stimulate or slow down the market’s growth. Higher money supply and lower interest rates promote economic activity, and the opposite changes constrict it.
- Assuming that the country’s reserve requirement is equal to 0.08, the currency-deposit ratio is 0.10, and the excess reserve ratio is 0.05, the simple deposit and money multipliers can be calculated. The former is equal to one divided by the reserve requirement, and in this case, its value is 12.5. The latter is equal to the sum of the currency-deposit ratio and one divided by the sum of the currency-deposit ratio, reserve requirement, and excess reserve ratio, and its value is approximately 4.78.
- In a case where the monetary base is $1,000 billion, and the money multiplier is 5.5, the overall money supply is equal to the result of a multiplication of the two values. Therefore, the size of the money supply in the situation described above is $5,500 billion.
- The interest rates of the country’s banks directly correlate with those set by the central bank, as can be seen in the graph. The prime rate is the one used for the bank’s best customers, but the other rates change accordingly, as well. Expansionary economic policies would involve a lowering of rates to stimulate the economy, which would lead to a subsequent decrease of interest rates by the country’s banks. Furthermore, the central bank’s usual method of lowering its rate, the purchase of government securities, tends to increase their price, reducing the rate of interest as a result.
- An increase in U.S. income would result in an increased supply of dollars to the international market, as consumers and companies would become more willing to spend. Therefore, the supply curve would shift to the right while the demand curve would remain stationary because nothing else has changed from the initial situation. As a result, the two curves would now intersect in point C instead of point A, and the exchange rate would be lower, which means that the value of the dollar would depreciate.
- Assuming a situation of disequilibrium in a fixed exchange rate situation, the Federal Reserve’s goal would be to eliminate the inequality without disrupting the exchange rate. It would achieve that by purchasing the currency that is in excess using the currency that is in deficit or its gold reserves. As a result, the supply of the lacking money increases while demand for the overabundant currency is lowered, and the exchange rate does not change while the gap is being removed.
- McDonald’s, Burger King, Wendy’s, and other fast food chains operate in a market where there are many potential competitors. However, the three companies hold the majority of the U.S. burger market when combined and mostly target each other in terms of offerings and improvements. Many promotions and new products that are introduced by the enterprises directly or indirectly aim to outperform similar initiatives by the other two. This behavior can be considered oligopolistic, as a few large companies dominate the market and only compete with each other.
- McDonald’s prefers to expand into markets that have high potential value and are not bound by prohibitive legislation. During the company’s entry into China, a typically problematic market for fast food chains, McDonald’s used a joint venture approach to receive agricultural subsidies. Furthermore, McDonald’s has frequently been the target of backlash due to possibly promoting obesity. As such, the company chose to begin displaying calorie counts on all of its products. It has also entered partnerships with Chinese educational authorities to host nutrition classes and address the issue by spreading information.
- Reasons for changes in demand for McDonald’s products include the shifting tastes of consumers, increased fat content awareness of the customers, and the emergence of “quick-casual” restaurants. The company can only control the second factor to a significant degree, as it decides the content of its food offerings. However, the changes cannot be too significant, as the unhealthy nature of the products is a part of the brand’s identity, and significantly changing the menu would substantially and negatively affect demand.
- President Trump has claimed that the Fed’s Chairman, Jerome Powell, seemed to enjoy raising rates. However, the U.S. president has noted that he does not intend to fire Powell. The events are not unusual, as many other U.S. Presidents have maintained troubled relationships with heads of the Federal Reserve. The situation is a rare case of public criticism of the leader of the Fed by the head of state. Most other Presidents, while not necessarily satisfied with the work of the Reserve, expressed their disapproval in private or through other people, such as administration officials in the case of Reagan or the Treasury Secretary for George H.W. Bush.
- The Fed’s primary macroeconomic goals in 2018 are decreasing unemployment and maintaining a stable inflation rate. It is increasing interest rates in an attempt to achieve those aims. President Trump’s views, on the other hand, are mainly formed by the time he has spent working in real estate. High interest rates interfere with the business of private companies, which is in line with their aim of dampening economic activities. From a businessman’s viewpoint, which Mr. Trump appears to adopt, lower rates result in greater prosperity, and he wants to have them reduced as a result.
- The Wall Street Journal outlines four rules that the Fed’s chairman, Jerome Powell, uses to deal with criticism by President Trump. The first is to avoid speaking of Mr. Trump, which helps the Chairman evade excess attention. The second is not to engage when provoked and to avoid general interaction. The third is to make allies outside the Oval Office, as it is not the only source of influence. The fourth, and last, is to talk about the economy to avoid giving President Trump a reason to feel criticized.
- If the Federal Reserve conceded to President Trump’s demands and lowered interest rates, the economy would experience a period of increased short-term growth. Unemployment would decrease, and inflation would rise, as wages would be raised to attract workers. However, economies that are growing too fast without appropriate safeguards are prone to the formation of financial bubbles and consequent crashes as well as recessions. These situations are usually accompanied by high inflation without corresponding earnings increases and a significant slowing, sometimes even reversal, of economic growth.
- President Trump may not be able to fire Federal Reserve Chairman Powell at will, as he needs a cause to do so, and the definition of the term “cause” is unclear. Courts and legal scholar consider crimes such as malfeasance and neglect sufficient reasons, and Powell is not guilty of either. However, there is no precedent for firing a Federal Reserve Chairman, and therefore the decision of the Supreme Court to support or forbid such an action cannot be determined in advance.