Reference no: EM1374513

Intelligent fiscal policy and appropriate monetary policy permit for a stabilizing influence on US economy. The government is able to make action through expansionary or contractionary fiscal policy to manage recession and inflation when necessary.
Fiscal Policy Effects
Recession may prompt the government through the use of expansionary fiscal policy to identify methods to shift the economy's aggregate demand curve to the right. A reduction in taxes and an increase in government spending can increase aggregate demand and read GDP, (McConnell & Brue, 2004, p.3). However inflation may prompt policy makers to use contractionary fiscal policy by decreased government spending and raising of taxes. A GDP gap that is in an inflationary rise can be eliminated through the use of successful fiscal policy, (McConnell & Brue, 2004, p.5).
Monetary Policy Effects
Monetary policy consists of money supply strategies to attain economic growth by controlling interest rates and maintaining full employment. The Federal Reserve Banks use open-market operations, the reserve ratio, and discount rate to affect money supply. If recession takes place, aggregate demand can be increase by the Fed through the increase of securities but the lowering of reserve ratio and discount rate. However, if inflation occurs, securities could be sold and an increase in reserve ratio and discount rate will tighten the supply of money (McConnell & Brue, 2004, p.11).
Challenges of Policies
Policy makers must recognize several challenges while decision making. Challenges to be overcome include the limitations of fiscal and monetary policy. From the time recession or inflation occurs to the time it is apparent, a great deal of recognition lag takes place, making it more difficult for fiscal and monetary policy makers to act effectively. Similarly, operational lag slows down the process of ensuring correct policy is implemented and carried out to address macroeconomic factors. Although fiscal policy involves administrative lag, monetary policy can be applied immediately after inflation or recession has been recognized. Other than time lags, fiscal policy might not be as effective since political considerations may coerce government officials to make decisions that are not appropriate economically. Also, changes in fiscal policy may involve potential knowledge of the population that it is merely temporary, and the effect the policy is meant to have will be disregarded. Another challenge associated with fiscal policy is the crowding-out effect, "which weakens or cancels the stimulus of the expansionary policy" making it "totally ineffective," (McConnell & Brue, 2004, p.15). Monetary policy similarly entails several challenges. The velocity of money may decrease as money supply is being increased by the Fed, and vise versa. These are several of many challenges policy makers must address, which can in turn effect in specific, the automotive industry.
Best Practices
An article in a local newspaper stated that General Motors' shares touched their lowest price in more than twenty years. The article also stated that the world's largest automaker has experienced a difficult year in 2005 and the future is uncertain. If this happens to be the case, the entire automotive industry needs to identify certain practices to respond to the changes that have occurred. A big factor of how the industry can exceed its expectations is to benchmark other automotive industries in other countries. In Japan, some Japanese manufacturing firms, such as Honda and Toyota, have renewed attention back to the importance of cost reduction. They have accumulated this reduction from existing products that will give them more productivity and growth.
A look at the insurance industry can give a perspective into other industries as well. The insurance industry is undergoing changes that are impacting the types of products created and the business processes required for daily operations. Offers of new services and new distribution systems are driving insurance providers to seek alternate methods to conduct business, as well as innovative technology and a re-engineering of traditional business processes. The expansion and globalization of current products that can exceed expectations and can grow too fast giving rise to several challenges.
Challenges
Some challenges that exist that need to be corrected for the industry are trying to improve fuel economy, enhance performance and safety issues, while at the same time gain profit while maintaining high quality levels for consumers. To meet and exceed these challenges, the automotive industry must develop new materials and enhance their manufacturing process.
A slowdown in the industry is currently taking place and thousands of jobs are now widely acknowledged to be part of a recession gripping the entire manufacturing sector of the US economy. "After nearly a decade of record sales and corporate profits, purchases of cars and trucks fell sharply in the fourth quarter of 2000." (March 2001) Rising fuel prices, the fall on the stock market, worries about job security and a decrease in consumer confidence all led to the decline. To turn this around, the majority of the industry will cut costs and workers, but will start cutting in places overseas like Latin America.
The automobile industry can look at U.S. commercial banks to see how they expanded their range of activities in recent years. However, "some observers worry that banks with access to a federal safety net have strong incentives to use new opportunities to take greater risks and increase their likelihood of failure." (July 2002). There is always some debate when attempting to pursue avenues of expansion and growth. It is extremely important that the automobile industry balances the advantages and disadvantages to create a diverse situation while maintaining creative and durable products.