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The US Economy and the Role of the Fed: A Keynesian Perspective

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Develop an economic analysis and recommendation, on the current state of the U.S. economy in the areas of unemployment, interest rates, expectations and consumer income from a Keynesian perspective.

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A Keynesian Analysis: US Unemployment, Consumer Income, Interest Rates, and Expectations

In looking at the monthly and yearly trends from the last 33 years, from 1980 to 2013, with regard to unemployment rates (US Bureau of Labor Statistics), it is obvious that unemployment rates in the US reached their highest point in 1983 with rates going over 10%. The next high point would be in 2009, when unemployment would again reach the historic 10% (that lasted only a month). However, although unemployment from 2009 onwards did not persist at 10%, it still persisted at remarkably high levels of 9 and 8%. What is striking is how the 1983 average unemployment rate, which was 9.6% (a bit lower than the 9.625% from 2010), already began to revert back to its original 1982 and 1981 levels the following year. In 1984, figures dropped down to the 7% range and then even to the 5% range by the end of 1987. This ideal that employment markets adjust on their own, without much intervention from government, is a very contra Keynesian ideal, supported by classical economists. Apparently, it did work in the 1980s, as labour markets adjusted and reverted back to their original state. Nevertheless, in the 2000s, unemployment persisted longer than its 1980s predecessor. Unemployment did not revert back to the 2008 and 2007 levels after the 2009 jump in unemployment rates from the recession. In fact, unemployment continued strongly, although it did fall in small increments. What is alarming is how it took only 2 years in the 80s for unemployment to revert back to original levels prior to a recession; yet, unemployment has yet to reach its pre-2009 levels within the 5-6% range. Rather, it continues to remain in the 7% range, with a 2013 annual average of 7.35%.

Clearly, Keynes' idea that markets ultimately fail and do not adjust naturally themselves without the aid of government is gaining more ground today. The current labour market is unprecedented; the US unemployment rate is persistently not adjusting to its prior levels and this does not bode well for any legitimacy of economic classical theory. Generally, classical economists believe that, alongside a recession, demand would fall in an economy, and thus bring down inflation and the wage rate. Afterwards, this would supposedly enable more capital investments and employees hired on the part of employers, which would in turn benefit the economy. Nevertheless, the way unemployment ...

Solution Summary

This solution looks at the US economy and considers its labor markets, inflation, consumer spending and confidence, and how these all tie into the Federal Reserve's response to the economic recession of 2008/2009. Through interest rates and other monetary policy tools, the Federal Reserve certainly had a larger role to play in this economic downturn. Keynes theories and ideas has definitely resonated in the design of policies addressing this paradigm change, which included the persistence of unemployment and low consumer spending that is still continuing to this day. A look at labor statistics, consumer indices for spending and perception of the US economy, as well as statements made by the Federal Reserve, are used to highlight these policy responses.

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Study Guide for test, Classical and Keynesian view of the economy, Federal Reserve role in the economy.

1. Delineate the differences between Classical and Keynesian views of the economy. Describe the circumstances that led to the development and dissemination of the Keynesian economic theories. Evaluate each system from a modern perspective with special attention to the strengths and weaknesses inherent in each system to influence macroeconomic factors in the current economic environment. Bring the expansion of societal responsibilities and the globalization of markets into the discussion.

2. Describe the functions of money in our society. How does the money supply influence the macroeconomic goals of price stability, full employment, and economic growth? Describe the major tools the Federal Reserve System uses to influence the money supply.

3. What possibilities exist when government increases its level of spending? Describe the role and effectiveness of monetary and fiscal policy in the achievement of these goals. Include a discussion of the monetary base and the concept of the multiplier in your essay.

4. Describe the evolution and responsibilities of the Federal Reserve System. What circumstances promulgated both the development and composition of the system?

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