Economic Analysis Report

This report analyzes two articles: one on slowing US job growth and rising wages, and another on the paradox faced by China due to US interest rate hikes. The report defines key economic concepts like expansionary fiscal policy, budget deficit, labor market expansion, full employment, federal funds rate, interest rates, exchange rates, currency appreciation, and depreciation. It applies these concepts to analyze the implications of the issues discussed in the articles, providing economic insights and suggesting solutions. For the first article, the report discusses the potential increase in budget deficit due to expansionary fiscal policy and the implications of a labor market nearing full employment. For the second article, it examines the impact of US interest rate hikes on China's capital outflows, currency decline, and fragile financial sector. The report concludes by summarizing the findings and offering recommendations for addressing the identified economic challenges.

Contents
Introduction.................................................................................................................................................2
Article 1.......................................................................................................................................................2
Summary.............................................................................................................................................2
Definition of Economic concepts used.................................................................................................3
Economic analysis................................................................................................................................3
Conclusion...........................................................................................................................................6
Article 2.......................................................................................................................................................7
Summary.............................................................................................................................................7
Definition of Economic concepts used.................................................................................................7
Economic analysis................................................................................................................................8
Conclusion.........................................................................................................................................11
References:................................................................................................................................................12
1

Introduction
The aim of this report is to summarize the key issues identified in the articles published in
newspapers and to identify the key economic definitions used in those articles. After this, the
report applies those concepts of economics to the key issues for determining the implications of
the issue and to identify the possible solutions for the same. Finally, the issue has been evaluated
in terms of applicability, usability and giving recommendations for solving that issue.
Article 1
Summary
Article 1 ("Job growth in US slows in December but wages climb", 2017): The first article talks
about the slowing down of the job growth in US and the climbing of wages. In December, the
employment in the US increased at the level which was less than expected but, the wages got
rebounded for sustaining the momentum in labor market. Thus, the economy of US was all set
up for the stronger growth and for the hike in rate of interest from the Federal Reserve. There
was increase in the non-farm payrolls and the gains are above the sufficient level which helps in
absorbing new entrants in the labor market. The numbers of jobs created in the past months were
more than that of the previous month and hence the average hourly earnings increased in the US.
The rise in the rate of wages has been largest since June 2009. For further lifting up the
growth, the expansionary fiscal policy is likely to get adopted but it will increase the budget
deficit of the country. The labor market is already expanding and along with that the
economic growth will become faster, but that will lead to Fed falling behind the curve on
the hike in the rate of interests.
2

Definition of Economic concepts used
The following economic concepts have been used here:
Expansionary fiscal policy: It is a policy by government which is adopted so that the money
supply in the economy gets increased and the rate of inflation is raised. This is done by
decreasing the rate of taxes, and increasing the expenditure of the government (Hansen, 2013).
Thus, this helps in fighting the recessionary pressures of the economy. When the taxes are
reduced, the disposable income of the people gets increased thus they spend more and consume
more. When the goods and services are invested into and the people spend more, the GDP of the
country gets improved.
Budget deficit: The financial health of the country is indicated by the budget deficit. The budget
deficit is said to have occurred when the expenditures exceed the revenue of government
(Moran, 2014).
Expansion in the labor market: The supply and demand for the labor is called as the labor market
where the supply of labor is provided by the employees and the employers create the demand for
labor (David, 2013). The labor market is the major component of any economy and it is tied up
with the capital market, and the market for goods and services. The labor market gets expanded
when the demand and the supply expands. This means that more people want to enter the market
and more people are required by the employers to work.
Full employment: It is a condition where all the people who can work and they are willing to
work are employed in the economy at a particular time (Beveridge, 2014).
Economic analysis
Application of the concepts and theories to the key issue
3

According to the first article, “But the proposed expansionary fiscal policy stance could increase
the budget deficit (refer to the diagram1 below). That, together with faster economic growth and
a labor market that is expected to hit full employment (refer to the diagram2 below). This year
could spark concerns about the Fed falling behind the curve on interest rate hikes (refer to the
diagram3 below).” ("Job growth in US slows in December but wages climb", 2017).
Diagram 1
In the above diagram, when the expansionary fiscal policy is adopted, the government reduces
the rate of taxes and r1 falls to r2. Thus the government was borrowing LF1 which increased to
LF2 and the supply curve shifted right. With the rise in the loanable funds borrowed by the
government, the budget deficit o the government will rise.
4

Diagram 2
In the above diagram, the full employment is reached E. at this point, the aggregate demand
curve and the short run supply of the labor meets at point E which is the equilibrium price and
GDP level. At point E, the full employment is depicted by long run aggregate supply curve being
a vertically straight line which shows that all the people in the economy are employed.
Diagram 3
5

In the above diagram the rate of interest rises from i* to i** which lead to shift in the demand for
money curve to the right and demand curve shifts from D to D’. this leads to rise in the demand for
money from M* to M**.
Determination of price in the economy
In an economy, price of all the goods and services are determined by the intersection of
aggregate demand and aggregate supply.
In the above diagram, the prices of goods and services are determined at point ‘e’ when the
aggregate demand (AD) curve intersects aggregate demand (AS) curve. This is the level at which
the optimal level of price and output of the economy can be determined.
Factor affecting aggregate demand
6

Factor affecting aggregate demand are consumption, investment, government expenditure and
net export. Thus, increase in any one of above factor shift the aggregate demand curve right side
and vice-versa.
When the economy is not at equilibrium level and is operating below full employment, the above
situation arises. In long-run, aggregate increase from AD(1) to AD(2) and equilibrium shift from
E(1) to E(2). Thus, as a result economy attains its full employment level.
7

If the economy is at above full employment level and the aggregate supply curve shift leftward
from AS(1) to AS(2), the price will decrease from P(1) and P(2) and output increases from Y(1)
to Y(2). It will control the inflationary pressure in an economy.
8

In the above diagram, when the consumption and the investment falls, which are a part of AD,
the AD1 curve shifts left from AD1 to AD2 and hence the price falls from P1 to P2. This shows
that Consumption and investment has an impact on the demand of the economy and on the level
of prices.
9

In the above diagram, when the expansionary policy is adopted, the aggregate demand AD1
shifts to the right to AD2 and the aggregate supply in the economy rises too from AS1 to AS2.
As a result, the real GDP of the country rises from Y1 to Y2 and the level of prices in the
economy falls a bit. Similarly, when the spending by government rises, then also the money
supply curve shifts to the right, indicating an increase in the supply of money in economy.
When the expansionary fiscal policy is adopted by the government of a country, the government
reduces the amount of taxes and hence the government earns less as far as the revenue of the
government is concerned. Also, the government increases its spending so it puts an extra burden
on the pocket of government as it has to arrange for funds for spending extra. Now, the revenue
falls and the spending rises which cause a gap and hence the budget deficit increases.
10

With the expansionary policy, the economy of country grows in terms of GDP, increase in the
rate of employment etc. With the rise in people getting absorbed in the labor market, the
employment rate will rise and thus, the full employment will be reached after a certain point of
time. When all the people who are able to work and who want to work are earning in the
economy, then the money supply in the country will rise. They will spend more and invest more.
With the increase in investment, the rate of interest is likely to fall and thus, Fed will not be able
to increase these rates.
The situation depicted in this article is likely to increase the rate of inflation in the country and it
is likely to increase the budget deficit of the country.
Implications and the economic insights
The problems caused and the possible solutions:
According to the first article, the problems that can be suffered by the economy of US are that
the rate of inflation of this country will jump and thus the economy will get unstable. The people
in US, who have fixed incomes, will not be able to afford the goods and services sold in the
country. Also, with the continuous increase in the spending by government, the budget deficit is
like to increase too much which is not good for the GDP and the growth of the country. This
problem has occurred because the rate of employment in the country is increasing and hence
more people are getting paid which is contributing to rise in the money supply in the country.
To solve this problem, the government should control the level of inflation in the country. For
this, the government should decrease its spending and it should increase the level of taxes
(Weale, 2015). When this will happen, the country will be benefitted in two ways. One is that the
money supply in the economy will be controlled and the goods and services will become
11

affordable to all the people. Secondly, when the government will earn more money from the
taxes and it will decrease its spending, then the budget deficit will get improved. It is a good sign
that the employment in the country is getting improved, but at the same time, the economy needs
to think about those people who are unemployed and they will face difficulty in paying for the
increased cost of goods and services.
Conclusion
In the first article, author has stated that the rate of unemployment can be lowered with the
expansionary fiscal policy but it will lead to rise in the budget deficit. The labor, market of US is
near to full employment due to which the rate of employment has lowered down. The remaining
positions that are not filled yet are because the employers are not getting the qualified people
who can take up those positions. Therefore, according to me, the slow rate of employment
increase is justified and acceptable. This is because if the positions get filled by some person
who does not have the required qualification or experience, then the outcome will not come as
expected and it will be a loss to the economy of country. The argument that the author has made
sounds convincing. Since almost all the people in economy are employed and they have jobs so
the money supply in the economy is more and this is likely to increase the rate of inflation in the
country. Hence, the government requires controlling this rising rate so that the economy stays
balanced and it does not create problem in the future.
Article 2
Summary
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