Introduction
The great recession refers to the period marked by the decline in countries’ economies around the globe. The great recession took place between the year 2007 to 2009 (Cashin, D., Lenney, Lutz, & Peterman, 2018). The International Monetary fund declared the great recession the second worst economic crisis after the great depression. The recession severed relations between countries globally. The recession had effects such as increased unemployment and the collapse of international trade. The governments of the world and the central bank acted by enacting monetary and fiscal policies in order to counter the economic impacts of the great recession (Bown, 2018). This paper focuses on the degree to which demand-side procedures during the great recession of 2008 have successfully reduced unemployment and restored financial growth.
Fiscal policies
Economic policies entail different types of government spending and tax cuts passed by Congress. The American government enacted financial policies during the economic crisis to stimulate the economy and prevent a further decline in economic activity. The monetary policies included passing the stimulus package, and the American Recovery and Reinvestment Act of 2009 (Cashin et al., 2018). The stimulus package provided tax cuts and increased government expenditure on infrastructure and other projects. Implementation of the policies by the government economically helped businesses and homeowners struggling during the recession. The guidelines included providing businesses loans, other financial assistance, and incentives for homeowners to stay in their homes. The stimulus package and other fiscal policies implemented by the U.S. government during the great recession helped to stabilize the economy and prevent a further decline in economic activity.
The economic stimulus act of 2008 is a piece of legislation composed by Congress to alleviate the effects of the economic crisis of the year 2008. The legislation provided several tax breaks and government spending programs for the show, including the Troubled Asset Relief Program (Cashin et al., 2018). The financial stimulus act had several positive effects on the U.S. economy. The most immediate impact was the injection of billions of government spending into the economy. The injection helped offset some of the private sector spending lost due to the recession.
The economic stimulus act had several long-term effects. One of the most significant was expanding the Earned Income Tax Credit. The EITC is an available tax credit and moderate-income working families. The development of the EITC in the stimulus act helped to increase the incomes of millions of working families across the United States. However, the economic stimulus act of 2008 was not universally accepted. Some critics argued that the stimulus package needed to do more to address the underlying causes of the recession. In addition, the critics argued that the stimulus package focused too much on tax cuts and rather than including more spending on infrastructure and other investments (Cashin et al., 2018). Generally, the economic stimulus act of 2008 was generally seen as a success since it helped mitigate the effects of the Great Recession and laid the groundwork for economic recovery.
The American Recovery and Reinvestment Act of 2009 (ARRA) is a piece of legislation that was enacted on February 17, 2009. The ARRA was a Seven hundred and eighty-seven dollars billion economic stimulus package that was designed to save millions of jobs and jumpstart the economy of the U.S. by investing in infrastructure, education, health, and renewable energy. The ARRA consisted of tax cuts, increased government spending, and increased borrowing. The law required that $225 billion be spent on infrastructure projects, $100 billion on education, $87 billion on health care, and $20 billion on energy.
In addition, the ARRA advocated buying locally produced goods in preference to imported goods in federal states and municipal projects funded by ARRA. The preference motivated American citizens to produce more goods since the market was readily available. The preference created more jobs as many people ventured into the production field. Some of the workers used their income to invest in other sectors of the economy, creating more employment opportunities. However, the preference would cease to be functional once the lifespan of the act expires. The ARRA helped in economic restructuring by promoting the purchase of locally produced goods.
Monetary Policies
Monetary policies are a collection of measures used to manage a nation’s general money supply and attain financial development. Economic policies involve actions taken by the Central Bank to maintain the dollar’s value by guarding it against inflation. The guard against inflation was to be implemented by keeping the supply of money in the economy steady with growth and price target set by the government (Bown, 2018). The policies included the discount rate, reserve requirements, interest on reserves, and open market operations.
Interest rate accumulated from borrowed money refers to the discount rate imposed on banks by the federal reserve when the banks borrow money. In 2008, the Federal Reserve lowered the discount rate several times to encourage banks to lend more funds (Cashin et al., 2018). The lowering of the interest rate was meant to stimulate banks to lend more money to businesses and consumers since the borrowing costs would be low. The increment in loans given to consumers and companies would help to stimulate economic growth. Discounted rates helped jumpstart the U.S. economy during the 2008 great recession by making it cheaper for businesses to borrow money
The reserve requirements refer to the percentage of deposits banks must retain in reserve and not lend out. The Federal reserve uses the reserves as a tool to regulate the flow of money. The federal reserve lowered reserve requirements for banks during the 2008 great recession in an effort to encourage lending and jumpstart the economy. The impact of lowering reserve requirements was felt more in the short term as it took time for banks to adjust their lending. However, in the long term, it helped to increase the money supply and hence stimulating economic growth.
The Federal Reserve lowered interest rates in an attempt to jumpstart the U.S. economy during the 2008 great recession. The lowering of the interest rates increased the money supply and lowered borrowing costs, which boosted economic activity (Cashin et al., 2018). In addition, the Federal Reserve maintained an extensive portfolio of Treasury securities in order to keep borrowing costs low and support the economy. Moreover, the federal reserve bought Treasury securities thus effectively taking them off the market and reducing the supply of available funds. Taking treasury securities off the market helped keep interest rates low and support economic activity.
Deficit spending entails the government’s expenditure exceeding the revenue collected for the budget deficit. Deficit spending can help to stimulate the economy, fund essential services, and finance infrastructure. On the contrary, deficit spending leads to an increase in public debt and crowding out private investment. The effect of federal government borrowing on the economy can be positive or negative, depending on the circumstances. If the government borrows to fund productive investments, the borrowing will result to economic growth (Bown, 2018). However, if the government borrows to support unproductive activities, the effect will be decline in economic growth.
Deficit spending helped to increase economic activity and create jobs. The government used deficit spending to fund infrastructure projects. The funded projects helped in creation of jobs which to led improvement in the economy since many people were employed and earned an income. The workers used the revenue to invest in other sectors of the economy. Deficit spending can also fund development and research, which leads to new services and products that can create jobs and help grow the economy(Cashin et al., 2018). The deficit spending increased the employment level, which stimulated the economy.
The deficit spending in the United States during the economic crisis significantly helped in the provision of essential services by providing additional funding to government programs that managed the services to keep them running. Many of these services would have been forced to close without this funding. The closure of essential services would have adversly affected the economy and the lives of those who relied on them. The provision of basic services enabled people to concentrate on other needs and ways of surviving during the economic crisis. Channeling funds towards provistion of essential services was necessary in times of economic turmoil to cushion the economy from further damage.
The U.S. federal government ran budget deficits during the Great Recession to stimulate the economy. The budget deficit led to an increase in public debt. The budget deficits were financed by issuing government bonds. The increased debt led to higher interest payments on the bonds, which put upward pressure on interest rates and increased the cost of borrowing for everyone. The budget deficits also increased the money supply, which led to inflationary pressures and rising prices (Kashian et al., 2018). The government expenditure was more than its revenue. The deficit was unsustainable in the long run. The government eventually had to cut spending or raise taxes to reduce the debt. The long-term effect of the borrowing was an increase in public debt. The increase in public debt raised the tax rate.
Conclusion
In conclusion, the monetray policy pursued by the federal reserve has been succcesful in restoring the econmy of us. The policy has helped to to bring about a significant reduction in the unemployment rate and a significant increase in the infaltion rate. In addition the monetary policy has helped to stabilize the financial markets and promote economic growth. The unemployment rate has fallen from a peak of 10.8 percent in october 2009 to 3.5 percentage in cotober 2019. On the other hand, fiscal policy during the Great Recession consisted of tax cuts and increased government spending. The fiscal policy helped to increase aggregate demand and revive the economy. The tax cuts included the stimulus package of 2008, which reduced taxes for individuals and businesses. The government also increased spending on infrastructure and social welfare programs which helped create jobs and provide a safety net for unemployed people. The U.S. economy has recovered from the recession, with GDP growth averaging 2.2 percente yearly since 2010.The Great Recession was a difficult time for the economy, but the government’s fiscal and monetary policies helped to revive it.
References
Cashin D., Lenney J., Lutz, B., & Peterman, W. (2018). Fiscal policy and aggregate demand in the USA before, during, and following the Great Recession. International Tax and Public Finance, 25(6), 1519-1558. Web.
Kashian, R. D., Tao, R., & Drago, R. (2018). Bank deserts in the USA and the Great Recession: geography and demographics. Journal of Economic Studies. Web.
Bown, C. P. (2018). Trade policy toward supply chains after the great recession. International Monetory Fund Economic Review, 66(3), 602-616. Web.