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Homework Help: Solved 191531

The current state of the economy is one where the inflation rate is increasing, the Gross Domestic Product is increasing and there is steady job growth – all factors pointing towards economic expansion. Overall inflation figures showed a rise due to the significant hike in food and energy prices. While the Federal Open Market Committee did not alter the federal funds rate with this monetary policy, leaving it at 5.25%, the core issue it faced was the increasing inflation rate. While inflation was expected to come down to a moderately acceptable level, there was a risk that this might not occur and this was the predominant policy concern. Due to the uncertainty about future inflation and growth, later policy adjustments would be determined by information received regarding these two factors. The increase in real GDP in the first half of 2007 was the same as that in the second half of 2006: at an annual rate of 2.25%. Though consumer spending and business fixed investment rose steadily, economic activity could not increase by the same amount due to the contraction in residential construction. Real GDP would also have increased by more had it not been for the lackluster inventory investment, a decrease in defense spending as well as a plummeting of net exports in the first quarter of 2007. However, the economy recovered from these effects in the second quarter as these figures reversed back to normal and the GDP growth rebounded. The labor market upheld its position from last year, as hiring continued steadily, while the unemployment rate remained unchanged at 4.5%. The sectors which experienced significant job growth were the service-producing industries, specifically health, education, dining, and those providing professional and technical services. Even as real hourly compensation increased, the boost in consumer prices reduced the extent to which this increase was felt. Factors which led to consumer price inflation boosts were the rebounding energy prices (which had dipped in 20060 as well as increase in retail food prices. Core inflation did not record a change, yet the purchasing power of households was restrained and their gains in wealth limited due to rise in energy prices. As financial market conditions remain satisfactory, investors seem to be confident about the future. Equity markets recorded significant profits, interest rates (intermediate- and long-term) increased and business borrowing continued as before. The gains that equity markets experienced were largely due to the continuing trend of corporations posting impressive profits and restoration of investor confidence in the economy. Economic and financial conditions are at the moment supportive of capital spending. Business investment also appears to be optimistic: there are solid gains to be realized on outlays on equipment and software as business output is expanding, profits are growing at an increasing pace, and financial conditions in general seem to be positive. The demand for exports of U.S. goods and services has also been growing and is expected to continue to grow favorably. However, this trend is more apparent in services, automobiles and industrial supplies and not so much in exports of capital goods. Expansion at a moderate rate is expected in latter half of 2007 as well as in the coming year. Inflation is a major deterrent for future policy but is expected to reduce during the course of the next year and a half. In the long run as well, the inflation rate is not expected to increase by a lot. This is because a number of factors which pushed up inflation have disappeared or are expected to do so. For one, demands on resource utilization are expected to relax and secondly, the futures market reflects that energy prices as well as prices of other commodities will not influence inflation in the near future. Additionally, while unit labor costs might have been increasing in the non-farm sector, generally the difference between markup of prices and unit labor costs is currently substantial enough for firms to absorb these higher costs by cutting down of profit margins. All factors withstanding, the Federal Reserve is still concerned about the possibility that the above expectations regarding inflation moderation might not be met. This is partly because the optimistic expectations might have been derived from factors which might be short-lived or inconsequential. Also, economic demands on resource utilization might remain at the same high-pressure level, which is likely to maintain the upward inflation trend. Costs could also be driven up by other forces, such as higher energy prices, increase in other commodity prices or an unchanging or snail’s pace growth in structural productivity. Another possible scenario is that as present high rates of inflation are prolonged, expectations of long-term inflation will rise and this itself will further drive up inflation. The Federal Reserve decided to leave its monetary policy unchanged and due to the ‘uncomfortable high’ inflation level prevalent, maintained the federal funds rate at 5.25%, last increased by 0.25% in 2006. There has been an increasing trend in this rate since 2004 and generally reflects an attempt to restrain inflationary pressures on the economy. Get your 100% original paper on any topic done in as little as 3 hours Learn More References FRB: Monetary Policy Report to the Congress. Retrieved, September 7, 2007 from the Federal Reserve Website.

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