POM 8

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Automotive Industry Report

Shaimika Jones

Waldorf University

Automotive Industry Report

In the United States, the automotive industry is the largest contributor to the economy. The automotive industry gives employment to millions of workers, including mechanical engineers, technicians, IT specialists, etc. This industry generates huge revenue for the country. According to the statistical reports of the previous years, the electric automotive industry is considered to be a significant sector of growth in the automobile industry (Davies et al., 2015). However, the monetary policies of the Federal Reserve propose certain suggestions for the electric vehicle industry. The electric vehicle industry must implement the suggestions by FED within the next two years. The report will discuss and highlight the current status of monetary policies and the federal budget that is likely to have an influence on the electric automotive industry, using economic theory to support the conclusions (Kushwaha & Singh, 2020).

Monetary Policies

Economists have designed two tools to analyze the economic activities of the marketplace. The two tools are Expansionary and contractionary monetary policies that control inflation and temper it. These tools also analyze the cash flow within the state’s economy. Expansionary monetary policy is responsible for fostering inflation. The interest rates are lower, and the government circulates more money within the state and creates more opportunities for business and full employment. This increases the aggregate demand in the economy. At the same time, contractionary monetary policy slows the economy. It reduces the amount of money that the government spends. The contractionary monetary policies reduce the aggregate demand and increase taxes and tariffs. By decreasing the government’s spending amount, this type of policy aims to prevent the economy from overheating. Both expansionary and contractionary monetary policies are significant tools for tracking the health of the economy (Čekanavičius, 2018).

The Federal Reserve has implemented the contractionary monetary policy in the United States recently. The Fed implemented the policy to cut short the expenses and circulate less money within the economy (Hussain, 2022). This step is very necessary to reduce the inflation pressure caused by more money circulating in the economy. Furthermore, the taxes are increased, and high-income earners and well-established business holdings are obligated to pay the taxes. These measures aim to reduce the budget deficit and slow down economic growth to control inflation.

Effects of contractionary monetary policy on the electric automotive industry

The contractionary monetary policies implemented by the Fed could affect the electric automotive industry over the next two years. The decline in government expenditures could reduce the demand for electric automobiles as the buyer’s purchasing power would be minimum. A rise in taxes and the government not giving subsidies and incentives to buy electric cars may change the sales trend for the electric vehicle industry. Additionally, investors would also avoid investing in this sector as the electric car demand decreases. The tools applied by contractionary monetary policies would make the investors cautious and aware of the risks. This would possibly hinder the development of the latest innovations and products.

Fiscal policies for closing the recessionary gap and an expansionary gap

The economic imbalance is a significant challenge that needs to be addressed. The Fed and government used monetary policies to close both recessionary gaps and expansionary gaps, slow down economic growth and reduce inflation, thus stabilizing the economy (Mlblevins, 2015). A recessionary gap occurs when there is a significant decrease in economic activity, resulting in decreased demand for goods and services, including electric vehicles. On the other hand, an expansionary gap occurs when there is an increase in economic activity, leading to increased demand for goods and services, including electric vehicles. Expansionary fiscal policies can be employed during a recessionary gap to increase demand for electric vehicles, while contractionary fiscal policies can be employed during an expansionary gap to decrease demand for electric vehicles.

The appropriate policy choice depends on the current economic conditions and the long-term goals of the electric automotive industry. Although, the electric automotive industry is impacted by both contractionary and expansionary monetary policies in different ways. During the expansionary monetary phase, the demand for electric cars increases. However, if contractionary fiscal policies are used to close an expansionary gap, it could result in reduced demand for EVs as consumers have less disposable income.

Reasons for budget deficits

When the government spends more money than it collects in revenue, it results in a budget deficit. More government expenditures and less revenue, or a combination of both, may lead to this problem. Budget deficits have a negative impact on the economy as they give rise to governmental debts Reasons for budget deficits. To overcome budget deficit problems, the Fed and government enact expansionary fiscal policy or deliberately reduces the amount of money being circulated in the economy.

However, budget deficits are an essential tool when the state faces economic turndown such as a recession. In such a phase, the government expenditures may help circulate the money wisely in various projects and businesses and create job opportunities. This is particularly important in the electric automotive industry, which is still in the early stages of development and requires significant investment to increase production capacity and lower costs.

Moreover, budget deficits are useful for addressing social as well as economic issues. These issues include inequality of wealth distribution, climate change, and investments in innovation and development. For example, investing in the electric automotive industry can have positive spillover effects on the environment by reducing carbon emissions, creating green jobs, and promoting sustainable transportation. This can generate significant long-term benefits that outweigh the short-term costs of budget deficits.

In conclusion, the electric automotive industry is greatly influenced by the federal budget and Monetary policy. The contractionary and expansionary monetary policies are effective and serve their own purpose in different ways. According to economic theory, expansionary monetary policy could benefit the electric automotive industry, as it tends to increase consumer purchasing power and increase the demand for electric vehicles, whereas the contractionary monetary policy has a negative impact on the industry since it is considered to decrease the demand. Different economic circumstances use different policies to keep the economy on track and maintain its health. It is important for the government to carefully consider its fiscal policy decisions and their potential impact on the electric automotive industry and the economy as a whole.

References

Barone, A. (2023, February 7). Budget deficit: Causes, effects, and prevention strategies. Investopedia. Retrieved May 1, 2023, from https://www.investopedia.com/terms/b/budget-deficit.asp

Davies, H., Cipcigan, L. M., Donovan, C., Newman, D., & Nieuwenhuis, P. (2015). The impact of electric automobility. The Global Automotive Industry, 185–198. https://doi.org/10.1002/9781118802366.ch16

Hussain, A. (2022). The Federal Reserve uses contractionary monetary policy to curb inflation that accompanies an overheating economy. Business Insider. Retrieved May 1, 2023, from https://www.businessinsider.com/personal-finance/what-is-contractionary-monetary-policy

Kushwaha, R., & Singh, B. (2020). An isolated bridgeless CUK-SEPIC converter fed electric vehicle charger. 2020 IEEE Industry Applications Society Annual Meeting. https://doi.org/10.1109/ias44978.2020.9334823

Mlblevins. (2015, May 6). Recessionary gap: Causes, effects, and potential solutions. Opinion Front. Retrieved May 1, 2023, from https://opinionfront.com/recessionary-gap-causes-effects-potential-solutions

Čekanavičius, L. (2018). On the choice of fiscal adjustment to financial crises: Expansionary vs. contractionary policies. Ekonomika, 97(2), 7–17. https://doi.org/10.15388/ekon.2018.1.11783