The business cycle is on a slow upturn. We had a recession in 2001 and came out of it in the fourth quarter. Since then real GDP has been growing at a slow rate. The unemployment rate reached 6% in April of 2002 and since then has been between 5.6 and 5.9 percent, which is higher than the 4 % in the late 1990’s. Unemployment is higher now than it was in the recession last year when it was about 4.5 to 5.0 percent. However, the unemployment rate has decreased since the spring and summer when it was around 6.0 % and now is 5.7 %. The M2 money supply has been growing since the beginning of 2001. The velocity of M2 has decreased from 2.05 to 1.85 in the same period. This could indicate people are saving more of their money in safe places such as savings accounts and CD’s instead of riskier financial assests such as stocks and mutual funds. This is reinforced by the stock market that is shaky and continues to sputter, which has been a negative contributor to business cycle leading indexes.
Political issues have probably also contributed to the slow upturn. Terrorism, war in Afghanistan and impending war in
The Fed has been using expansionary monetary policy also. They have lowered the Federal Funds rate for the first time in about ten months. At the beginning of 2001 it was 5.98 % and now it is targeted at 1.25. This is to intice banks into borrowing more from other banks to increase the amount of reserves availble for loans, which could increase investment spending. The discount rate has also been lowered from 1.25 % to .75%. In the beginning of 2001 it was about 6%. So the Fed has made it clear that it is actively pushing for expansion in the economy by using the discount rate as a signal that it is encouraging economic expansion. Both the M1 and M2 money supplies have been increasing and the velocity of M1 has increased while the velocity of M2 has decreased. So the Fed’s operations show that it is increasing the money supply, reducing intrest rates and raising income. These measures and the state of the economy has dropped the bank’s prime interest rate to try to increase investment by business’s.
Iraq have people worried about instability of the country ranging from personal safety to oil prices. This is rein
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