Essay about Student: Economics and Unemployment Rate

Submitted By daojiang
Words: 664
Pages: 3

Essay #1 The current state of our economy is facing numerous threats and problems. For example, the recent crises in Middle East which caused oil price shock imposes a threat to our weak recovery. Another problem is the weak recovery. We are experiencing the weakest recovery on record for the United States. Last quarter’s advised GDP growth was only 2.8 percent. This is far below the average 5 or higher percent growth rate after recession. The weak recovery has been a major reason of another big problem for our economy—the job market. Unemployment rate has been staying at wildly 9% and above and there isn’t a sign of strong rebound in the foreseeable future in the job market. While all these are big problems that our economy is facing, I will argue that the real and the biggest problem lies in the financial market. Specifically the banks which are holding excess reserve, or not lending which caused a reduction in both consumption and investment is the fundamental problem in our economy. The reason that financial market is crucial for the economy is because they are responsible for channeling funds from savers to borrowers. The borrowers then either consumer the money today or make investment.(Borrowers typically do not just hold their borrowed money, otherwise they don’t need to borrow) The interest rate precisely determine how much an individual would consume and save and how much borrower would borrow because the interest itself is determined by the force between supply(savers) and demand (borrower) for the fund. Together, the interest rate determines the amount of savings and disavings and the well functioning financial market channels the money from savers to borrowers which eliminate what Keynes was so afraid of—not consuming enough or savings. The borrowed money that is used for investment is especially important for the economy because investments are important for economic growth and innovations. The financial intermediaries and especially banks are the ones who brought us into the recession and they are also responsible for the weak recovery. In short, the banks are sitting on huge excess reserve, or simply not lending. Falling housing prices which might cause banks to incur huge loses, higher default risk on loans during recession, and poor balance sheet from the crisis are the main reasons why banks aren’t lending. This led to what Keynes was so afraid of—savings. Because when banks are not lending, the flowing of funds from saver to borrowers reduced sharply or even stopped. This really hurts the economy because both consumption…