Running Head: THE ECONOMY, MONETARY POLICY AND MONOPOLIES
The Economy, Monetary Policy and Monopolies
The economy of any country is determined by the production, distribution and the consumption of services. The economy is categorized into macro and microeconomics. Macro economics is an analysis of the whole economy apart the issues affecting it. Micro economics takes a look at the behavior of a few aspects of the economy. When the authorities want to control the amount of money in supply in the country they employ monetary policies. These policies in most cases target the rates of interest prevailing in the economy with the objective of stimulating stability and growth in the said economy. The intention of monetary goals is prize stabilization in the market and the reduction of unemployment in the economy. There are various market situations and one of them is monopoly in which there is a single supplier of a product or service.
US Economic situation
The United States boasts of the largest economy in the world. It has the largest per capital income in the whole world. Its economy is a mixed one whereby there are a number of economic states operating at the same time. In the last five years, the economy has been going through an economic depression that has affected the rates of interest in the market and also had negative effects on the job market. The economy is on the path of recovery though the rates of unemployment are still high (North, 2012, para. 1). Interest rates have been gradually falling over the last five years and reached an all time low last year.
The rates of unemployment have been on the rise since 2007 when it stood at 4.5% to 8.1% in 2012. The country has been doing all it can to bring the economy back on to a normal path. The federal budget balance has been weakening by day after the other. One of the best indicators of how a country’s economy is fairing is the prevailing rates of unemployment.
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Strategies to encourage spending
During economic turndowns, people spend less of the money they have as there isn’t enough to meet all their expenses. To encourage spending by the people the Federal Reserve is supposed to make a revision of the monetary policy. The monetary policy will influence the inflation levels as well as the GDP. The stimulation of the monetary policy by the Federal Reserve will serve to trigger demand in the labor market which will in turn lead to reduction in the prices of commodities which will attract increased consumption.
The use of taxes can also be used in inflationary times. Taxes are potent tools that governments use to make adjustments to the economy. There are different tax groups that should be employed to different groups of consumers. the increase of taxes will make the people to spend less while reduction of taxes especially on consumer goods will lead to an increase in consumption as the products will be more affordable. The Federal Reserve should take measure even on a temporary basis that will encourage consumer to spend (Dines & Humez, 2003, p. 43). It is natural that the spending habits of consumers will change only if their incomes change on a permanent or temporary basis. There are a number of income groups. The lowest group lacks the ability to borrow funds. Reduction of taxes will trigger spending since the prices of commodities will be lowered because of the reduction in taxes. The low income group is very sensitive to price changes. When a vendor reduces the prices of goods even by a small margin the low income group will flock the shop to buy the goods at lower prices. Thus in order to encourage spending the government should reduce the prices of consumer goods to encourage more people to buy. Also the adjustment of taxes can raise the amount of cash people have at their disposal to spend. Higher earnings will encourage spending and hence growth.
Situation where the company used antitrust laws to stop a monopoly
There have been instances in the past when the government has had to step in and stop the creation of a monopoly. In 1982 the US government stepped in to stop AT&T from forming a monopoly (Sullivan & Hertz, n. d. para. 1). Back then AT&T was the dominating force in the telecommunication industry. It was then assumed that local exchanges as well as long distance operations were natural monopolies. AT&T exercised monopolistic powers whereby it denied the local people access to similar services from competitors. The competitors also had their opportunities through discrimination in price in delaying before notifying of new designs. The company went ahead started its competitive products at subsidized prices by shifting the costs it incurred costs regulated monopoly in the local exchange (Sullivan & Hertz, n. d, para. 16).
The government stepped in to stop AT&T from taking control of the technology industry. This intervention was necessary as it saved the competitors huge losses they would have incurred due to the loss of business. The customers would have suffered some losses. Had AT&T succeeded in its endeavor the company would be the sole provider of technology equipment in the entire world. It would also have much influence in the US economy where it would charge high prices for its services and products.
Identification consumer groups
The market is made up of many consumer groups. There are databases that have been gathered regarding the spending patterns of goods and services and their loyalty to a given company (Cox, 2012, p. 118). Loyal customers should be rewarded from time to time as a way of making them have a feeling of recognition and appreciation. The loyalty of customers can be determined by a customer group chart. The chart will help identify the most loyal customers who can then be awarded discounts. The charts have all the details about the spending of various customers. The discounts should be offered to the customers who rank at the top of the chart. Another method is to track the history of consumer’s in terms of bulk purchases. This category needs to be offered discounts so they can enjoy the economies of scale. The databases kept by the company are good in the identification of the most loyal customers as sit contains past, present and future customers.
Reasons why a monopoly may be inefficient for an economy
A business is a monopoly when it is the only one that deals in a particular product or service in a given economy. A monopoly market has restrictions to new entrants and information is not available freely to potential competitors. The main drawback of a monopoly is its restrictiveness of potential entrants. As there no other competitors a monopoly charges high prices for its products. It shields itself from competitors by making increased innovations that are never divulged to the competitors. The high prices are dangerous to the economy as they make customers spend less. The intervention of the government ensures the products offered by the monopoly are of value to the consumers. Where there is no government intervention monopolies employ unfair measure to produce their goods. A natural monopoly leads to resource misallocation (McKenzie & Lee, 2007, p. 32). This is the inefficient character of a monopolistic market.
The paper has shed light on types of an economy, monopoly and monetary policy. The recent depression has led to the shrinking of the US economy as a result of which the rates of inflation and unemployment have been on the increase. In 1982 the government stepped in to avert a monopoly of AT&T which could have led to huge losses to its competitors as well as the consumers of their products. Monopolies are not efficient but they can be if they are regulated by the government. A monopoly is said to be inefficient because of misallocated resources, high costs and prices.
Cox, E. (2012). Retail analytics: The secret weapon. Hoboken, New Jersey: Wiley.
Dines, G., & Humez, J. M. M. (2003). Gender, race, and class in media: A text-reader. Thousand Oaks: Sage.
McKenzie, R. B., & Lee, D. R. (2007). In defense of monopoly: How market power fosters creative production. Ann Arbor: University of Michigan Press.