Chapter Seven: Fed poised to cut rates; may take a break after that

http://biz.yahoo.com/ap/080429/fed_interest_rates.html?.v=4

The United States is still in recession and the interest rate cuts are slowly working to allow a better economy. However, inflation is becoming a huge problem in food and energy prices. The Federal Reserve plans to lower the rate to 2% and then leave it at this level for the year and maybe the next. They will have a meeting on April 29th to decide what their best move is. The problem is that if they lower the rates too much, inflation becomes a problem, but if they don’t lower the interest rates, the recession will be a problem.

This chapter explains how the bank can change economic situations by changing interest rates. We learned that a lower interest rate would lead to increased borrowing, which leads to an increase in spending. With increased spending, GDP would rise and allow the economy to counter a recession. The United States is trying to do this, but inflation is kicking in since there is more money, it is wise of companies to increase prices. This inflation will make the increase of money supply not effective as a way to counter the recession since inflation causes demand to drop.

I think the United States should slowly lower their interest rates without causing too much of a decrease so that inflation doesn’t kick in too fast. Leaving it to 2% and then taking a break doesn’t seem like a good idea in my opinion because inflation will be a huge problem. They should just increase government spending and continually changing interest rates to the economic situations to increase GDP. The recession is also not that bad in my opinion. They could possibly just let it pass by and not do too harsh economic changes that may cause side effects such as inflation.

Chapter Six: Plan would double state income tax for high earners

http://www.sj-r.com/news/stories/28056.asp

Mike Smith plans to raise income tax rates in Illinois from 3% to 6%, which would generate about $3 billion tax revenue. The tax increase will only apply to people earning over $250,000. The revenue will be spent on infrastructure, education, and tax relief for earners under $250,000. Many people are agreeing with him such as Rep. Joe Lyons, a Chicago Democrat who likes the idea of Robin Hood referendum. However, not everyone agrees with Smith. People also believe that increasing taxes will not help until they learn to control their spending. United States is in a recession and Rep. Frank Mautino recognizes this. He says he does not support it because doubling taxes during a recession is just insane.

In chapter 6, we looked at the determination of national income mainly using GDP, the gross domestic product. In times of recession, we are taught to lower taxes or increase government spending. Smith is doing the opposite, which is a bad idea. He is not just raising taxes a little bit, but doubling it. This will cause a great decrease in GDP where they are looking for an increase. Using the equations taught and assuming MPC is 0.8, change in GDP will be –[3 billion x (0.8/0.2)] = -$12 billion. This is a huge change in GDP and I do not think they will carry through with this plan.

I’m not sure what Smith is thinking, but I think he will use the tax to increase government spending. This sort of makes sense, but it will be really difficult for the civilians in Illinois. If they just try lowering taxes and carefully spending, they should do all right for the future. They are having problems controlling their spending so I think they should get professional economists to figure out where and when to spend their government funds.