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The main objective of this memo is to describe the effects of the European recession on America’s economy. The paper also advises on the appropriate policies that the government should employ to offset the effects of the recession.
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Effects of EU recession on the US economy
The recession will have a negative impact on America’s GDP. America’s GDP benefits from exports of goods and services to Europe. In addition, the economy of other countries that export to Europe will weaken, thus weakening the U.S. exports to them (OECD Staff 2001). Moreover, the recession will cause a meltdown in the financial market; thus, the panic in one financial market affects all other markets.
Secondly, there is a risk of increasing cases of unemployment due to the financial instability. In addition, price levels in the country are expected to go up. This is a result of the escalating inflation rates. Additionally, the housing industry is negatively affected; the construction of commercial buildings and new housing falls off. The vacant rates are high while housing prices continue to fall.
The policies the government should employ to offset these effects
The U.S. government should employ the monetary policy; which is boosting companies and bailing out of the threatened and falling institutions. This will prevent them from becoming obsolete, thus preventing more cases of unemployment and ensuring that prices are relatively stable. Secondly, the government can apply the fiscal policy; a tax cut is more appropriate than government spending, in this case, since there is less likely probability of increasing structural unemployment (Arnold, R. A. 2011)..
However, there is risk associated with these policies. For instance, they may lead to increased cases of unemployment. Also, the fiscal policy is not effective in the short run and involves high interest rates since the government has to borrow loans.