Demand-Side Policies and the Great Recession of 2008
Instructions:
Develop an essay discussing the fiscal and the monetary policies adopted and implemented by the federal during the Great Recession and their impacts on the U.S. economy.
1. Cover page with a running head
2. Introduction: What is the economic meaning of a recession?
· A brief discussion of fiscal policies
· A brief discussion of monetary policies
3. Conclusions: Discuss the extent to which the use of demand side policies (fiscal policy and monetary policy) during the Great Recession of 2008 has been successful in restoring economic growth and reducing unemployment
4. References
Use in-text citations whenever refer to or discuss idea that comes from another source.
Solution
Demand-Side Policies and the Great Recession of 2008
Introduction
Recession is an economic term used to illustrate tough economic times in a country where both macro and microeconomic factors are affected. It involves a period of economic decline where this decline lasts for six months; that is, the Gross Domestic Product of a country declines for two consecutive quarters. The increase in the unemployment rate of a region is a major factor used to indicate the existence of a recession. Other indicators of a recession include a decline in the stock and housing market. Factors that lead to the development of a recession include high-interest rates, inflation, reduced wages, and a decline in consumer confidence (Verick, & Islam, 2010). High-interest rates influence a recession since the high rates limit the amount of money in circulation because people are unable to borrow loans; hence, a decline in investments. Inflation causes recession since it involves an increase in the prices of goods and services within a specific period, leading to a decline of the consumption levels in the economy. A reduction in wages is also a cause of recession since if individuals in the economy receive low incomes, their purchasing power falls leading to a decline in consumption. Lastly, a decline in consumer confidence in the economy encourages them not to spend money; hence, leading to a decline of the money in circulation. This, on the other hand, leads to recession. The purpose of this study is to analyze the Great Recession of 2008, and identify the fiscal and monetary policies adopted and their impact on the US economy (Verick, & Islam, 2010).
Great Recession of 2008 and the Fiscal Policies
The great recession of 2008 was triggered by the bubble burst in the housing sector, which led to loss of wealth. People took large amounts of loans from financial institutions and bought expensive houses believing that the prices of the houses would rise, selling them at high prices. However, this did not happen since the bubble burst led to a decline in the prices in the real estate sector. The estimated loss from this housing bubble burst was $8 trillion, where the loss of wealth led to reduced consumption in the economy. The recession also led to massive job loss and increased unemployment, a decline in incomes, and increased poverty rates. Fiscal policies are crucial in such a situation since they involve a government adjusting its public expenditure and the tax rates to boost the economy aimed at increasing the demand for the idle resources. For instance, in 2008 the US Congress passed the Economic Stimulus Act which was signed by the then President George Bush. This bill was meant to refund the Americans the excessive taxes they had paid during the recession. The bill constituted of $152 billion, where a tax refund of $600 was made to the middle and low-income Americans (Verick, & Islam, 2010). Another fiscal policy was implemented in 2009; that is, the American Recovery and Reinvestment Act where it constituted of $787 billion meant to cover for public expenditure. This expenditure involved a tax rebate to the business investment where $184.9 billion covered for 2009 while $399.4 billion covered for 2010 (Nakamura & Steinsson, 2014). The rest of the amount was spread over to the rest of the years.
Monetary Policies
Monetary policies involve the creation and implementation of bills by the monetary authority of a region to regulate the supply of money. The monetary authority may include the Currency Board or Central Bank of a country, which target the interest and inflation rates to promote price stability and ensure people regain their confidence on the country’s economy. During the Great Recession of 2008 in the US, the Federal Reserve was charged with the responsibility of implementing monetary policies aimed at improving the country’s economic performance. One of the monetary tools used by the Federal Reserve in December 2008 was the Quantitative Easing, which exists to date. This monetary tool involves the Federal Reserve acquiring massive amounts of mortgage and Treasury bonds in the open market with the aim of regulating the interest rates (Verick & Islam, 2010). In this case, the Federal Reserve’s sole purpose was to lower the interest rates for both short and long-term borrowers. Therefore, a fall in interest rates would enable people to borrow money from the financial institutions promoting savings and investments in the economy.
Conclusion
The use of the demand side policies; that is, the monetary and fiscal policies in the United States during the Great Recession of 2008 had a huge impact in restoring the country’s economic growth. Some of the policies are still utilized to date by the current US government to prevent the occurrence of another recession. For instance, the Quantitative Easing used by the Federal Reserve ensured a decline in interest rates, which, on the other hand, led to a decline in inflation rates; hence, banks gave both short and long-term loans. The loans were used for investment purposes, which lead to the creation of job opportunities. This tool has been in operation since 2008 where the Federal Reserve utilizes it to monitor the interest and unemployment rates in the country. The fiscal policies implemented by the US Congress involving tax rebate, on the other hand, enabled the citizens to access money where they used it for consumption and investments. The tax refund to the business investment enabled entrepreneurs to create employment opportunities since they obtained money from the government.
References
Nakamura, E., & Steinsson, J. (2014). Fiscal Stimulus in a Monetary Union: Evidence from US Regions. The American Economic Review, 104(3), 753-792.
Verick, S., & Islam, I. (2010). The Great Recession of 2008-2009: Causes, Consequences, and Policy Responses.