Smith

YOU DECIDE

COURSE: BUSINESS ECONOMICS (GM-545)

SPRING SESSION-- (MAY 2012)

I would advise the President as follows:

He should not think of lowering or setting interest rates unless he wants to copy the Chinese system of Government- Commanded economy. If he still chooses to convert the US economy into a Chinese style economy, he would then have to set the exchange rates, the prices of various other goods and services and yet fail to achieve his objective coming out of recession fast and increasing employment faster. If he doesn’t want to lose his job by turning USA into a non-market, Government controlled economy; he should allow the Federal Reserve Board to deal with interest rates: whether or not the Fed succeeds in increasing employment by reducing interest rates is not the President's concern.

The President's focus should be on how the Government's legitimate actions and the spending power of the households and businesses can be increased. It seems that he has no choice but to continue the stimulus spending for another year; however, that alone may not help sustain a decrease in unemployment rate. He must reduce taxes at the lower levels of income drastically and reduce the corporate tax rates for the next two years so that their effective disposal income increases and they buy more locally produced goods and invest in capacity to produce more. Of course, reducing taxes would mean, the Government will have a larger deficit and high deficit can cause problem of inflation later besides making it costlier for private firms to borrow for their capital projects that create employment; Therefore, the President should do well to cut certain government expenditures to contain the deficit and further growth of government debt. This reorientation of government expenditure for two years would not hurt the process of government functioning but reduce government deficit and increase demand for domestically produced goods.