Fiscal policies in the US
In the United States, fiscal policy is the process through which the government uses spending and taxation to affect the economy. Until the Great Depression, it was laissez-faire until President Franklin D. Roosevelt introduced fiscal reforms in The New Deal. With fiscal restraint as a top priority, President Biden has cut the deficit by more than $1.3 trillion, the biggest reduction in a single year in American history. This historic decline has been exacerbated by the American Rescue Plan.
How does fiscal policy affect inflation?
When a government boosts its spending or cuts taxes, it injects more money into the economy. This infusion can spur higher demand for goods and services, which, in turn, can drive up prices. Conversely, when the government reduces spending or increases taxes, it withdraws money from circulation. This can lead to reduced demand for goods and services, potentially causing prices to drop.
Nevertheless, it's important to note that fiscal policy is just one piece of the puzzle when it comes to inflation dynamics.
How does inflation affect the economy?
Inflation is when things get more expensive over time, and it can affect the economy a lot. It makes stuff like food, utilities, and gas cost more, which means people can't buy as much with their money.
Sometimes, a little bit of inflation can be good for the economy. It can make people spend more and help the economy grow. But if prices go up too fast and people's wages don't, that's a problem.
Inflation isn't just bad for people buying things; it's also tough for companies. They have to pay more for things like coal and oil, and that makes it hard for them to make money. So, they raise the prices of their stuff, and we end up paying more.
When inflation happens, it can also make people worried about the future. They might not want to invest or save because they're not sure how much things will cost later. And sometimes, when inflation is really bad, people start buying a lot of stuff because they think it will be even more expensive later.
What is the current inflation rate in the US?
According to the U.S. Labor Department data published on Aug. 10, 2023, the annual inflation rate for the United States was 3.2% for the 12 months ended July. The next update on inflation is scheduled for release on Sept. 13 at 8:30 a.m.
What is the highest inflation rate in US history?
Since the introduction of the Consumer Price Index (CPI) in 1913, the highest inflation rate observed in the United States was 20.49% in 1917. However, since the founding of the United States in 1776, the highest year-over-year inflation rate observed was 29.78% in 1778. Notably, both of these cases of rapid inflation coincide with major wars.
How does inflation affect unemployment?
Inflation and unemployment are important economic signs. They usually work like a seesaw: when one is up, the other is down.
When many people can't find jobs (high unemployment), there are more job seekers than jobs. This means companies don't have to offer high salaries because many people are willing to work for less. So, wages stay the same, and salaries don't go up.
But when there are lots of jobs and not enough people to fill them (low unemployment), companies have to compete for workers. They do this by offering higher wages to attract employees. When wages go up, it can make products and services more expensive in the economy, leading to overall inflation.
However, this connection between unemployment and inflation isn't always so clear. Other things like how the government manages money, how much people want to buy things, and things like oil prices can also affect inflation. So, it's a bit more complicated than just unemployment and inflation being opposites.
How does inflation affect interest rates?
Inflation means stuff getting more expensive, and interest rates are like the cost of borrowing money.
In the United States, the Federal Reserve uses interest rates to control inflation. If prices are rising too fast, they make borrowing money cost more to slow down spending. When prices aren't going up much, they make borrowing cheaper to encourage people to spend more.
When interest rates are high, it's harder to borrow money, which can help stop prices from going up. When rates are low, it's easier to borrow, which can boost the economy.
But, it's not just inflation that affects interest rates. Other things like government policies, how much money is floating around, and stuff happening in the world, like oil prices, also matter.
