Introduction
The global economy experienced a significant downturn due to the Great Recession of 2008. Many countries, including the US, responded by enacting various demand-side policies, such as fiscal and monetary policy, to foster economic growth and reduce unemployment. In this paper, I will address the Federal Reserve’s actions to lower the federal funds rate and conduct significant asset purchases, as well as the two most frequently employed approaches to combat the recession: tax cuts and increased public spending.
A prolonged period of declining economic activity characterizes a recession, an economic phenomenon. This entails a dip in the gross domestic product, an increase in unemployment, a drop in consumer spending, and a drop in business investment. At least two consecutive quarters of negative economic growth are typically regarded as a recession (Kenny, 2020). To put it another way, the economy is contracting, which indicates a broader economic slump. Increasing poverty, inequality, and diminished consumer confidence are just a few of the destructive repercussions a recession can have on the economy.
Fiscal policy is a collection of government economic initiatives that affect the economy. These measures are based on the government’s manipulation of taxation and spending. The government typically reduces taxes and ups spending to spur growth while the economy is in a slump (Maciejewska et al., 2019). This is what is referred to as a more expansive Fiscal policy. Conversely, the government can increase taxes and cut spending when the economy is overheating to slow it down, which is a contradictory fiscal policy.
The government’s use of taxes and spending to affect the economy is known as fiscal policy. It can boost economic expansion, control inflation, and lower unemployment. Fiscal policy can be used to lessen the impact of a recession on the economy. Tax reductions and higher government spending can accomplish this (Maciejewska et al., 2019).
Fiscal policy is the term used to describe how the government uses taxes and spending to influence the economy. It can increase economic growth, manage inflation, and reduce unemployment. A recession’s adverse effects on the economy can be mitigated with the help of fiscal policy.
This can be achieved by increased government spending and tax savings (Kenny, 2020). The economy can be affected by fiscal policy both favorably and unfavorably. To secure the best economic results, governments must utilize fiscal policy intelligently and in concert with other economic measures.
An essential instrument for managing economic cycles and containing inflation is monetary policy. The Federal Reserve, the nation’s central bank, is in charge of establishing monetary policy. To boost the economy, the Federal Reserve typically lowers the federal funds rate, which is the price at which banks borrow from one another (Kenny, 2020). This lowers interest rates and promotes borrowing to stimulate the economy and avoid deflation. In contrast, the Federal Reserve will increase the federal funds rate to cool the economy down when it is overheating. This raises the cost of borrowing, which may help hold down inflation.
Fiscal Policies
Cutting Taxes
A catastrophic economic slowdown that started in the United States and eventually affected the entire world was known as the Great Recession of 2008. Many nations, including the US, responded by implementing various demand-side measures, such as fiscal policy, to boost economic growth and lower unemployment. Tax reductions were one of the most often employed fiscal policy strategies.
Tax reductions are a powerful tool for promoting economic expansion (Lago-Peñas et al., 2019). Tax cuts can free up money for investment, consumption, and other activities supporting economic growth by lowering the taxes that individuals and businesses must pay. Tax reductions can also enhance corporate profitability, which can create jobs and pay growth (Maciejewska et al., 2019). In reaction to the Great Recession, both the Bush and Obama administrations in the US enacted tax cuts.
The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 were two of the most notable tax cuts implemented in the US under the Bush administration (Gidron & Mijs, 2019). All taxpayers’ income tax rates were lowered, the child tax credit was increased, and another tax relief was offered due to these tax cuts, totaling $1.7 trillion over ten years (Lago-Peñas et al., 2019). The American Recovery and Reinvestment Act of 2009 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included tax cuts that were put into effect by the Obama administration (Lago-Peñas et al., 2019). These tax relief measures, which will save $800 billion in taxes over ten years, will broaden and continue the Bush tax cuts while lowering payroll taxes and other taxes (Lago-Peñas et al., 2019). This indicates that taxes on individuals and corporations will be reduced to boost economic growth.
Overall, the US economy has benefited from the tax cuts made by the Bush and Obama administrations. After the tax cuts were implemented, unemployment and GDP growth accelerated. Due to their emphasis on lower—and middle-income taxpayers, the tax cuts also contributed to reducing inequality (Maciejewska et al., 2019). The long-term impacts of the tax cuts, however, are still unknown. They might result in lower tax revenues for the government, which might result in budget deficits and greater debt.
Increasing Government Spending
To encourage economic activity, the government raises its spending on infrastructure improvements, tax breaks, and financial assistance to individuals and businesses. This is frequently carried out to fend off recessions brought on by a drop in aggregate demand. It can stimulate aggregate demand and, in turn, economic growth by raising government spending.
The efficacy of fiscal stimulus is frequently discussed among economists (Montes et al., 2019). Fiscal stimulus proponents contend that boosting aggregate demand can assist in reviving an economy in a downturn. It can promote maintaining consumer spending by supporting individuals and businesses financially (Montes et al., 2019). Additionally, it can support job growth and increased investment by funding infrastructure improvements and tax reductions.
During the Great Recession of 2008, boosting government spending had some success in reviving economic growth and lowering unemployment. In addition to tax benefits for corporations, the stimulus package featured government expenditure on infrastructure, education, and healthcare. This spending contributed to the growth of the economy and the creation of jobs (Gidron & Mijs, 2019). The increased consumer spending contributed to the economic recovery, as did the increased government spending (Montes et al., 2019).
Some progress has been made in lowering unemployment due to increased government spending. The unemployment rate peaked during the recession at 10%, but as of July 2019, it had dropped to 3.7% (Montes et al., 2019). This decline can be ascribed to the rise in government spending, which promoted employment development and economic expansion. Increased state debt, probable inflation, and a drop in international confidence are all negative consequences.
Fiscal stimulus detractors contend that, in some circumstances, it might have been ineffectual or even detrimental. For instance, excessive government expenditure can lead to significant deficits and long-term economic issues (Bremer, 2021). Furthermore, if government expenditure is not directed appropriately, it may not successfully promote economic expansion (Montes et al., 2019).
In addition, because the government is using a sizable share of the economic resources, there is a danger of crowding out private sector investment. Because part of the increased government expenditure was misallocated, the US economy has not recovered to its pre-recession growth rates, which has resulted in less effective economic outcomes. In addition, rising government debt could harm the economy in the future due to increased government spending.
Monetary Policies
Reducing Interest Rates
The Federal Reserve launched extensive asset purchases and cut the federal funds rate to nearly zero in the immediate aftermath of the 2008 recession to boost economic growth and lower unemployment. The federal funds rate is the interest rate at which depository institutions overnight lend balances held at the Federal Reserve to other depository institutions (Blanchard, 2019). The Federal Reserve helps banks lend to households and companies at cheaper interest rates by lowering the federal funds rate. This, in turn, increases spending and investment, which boosts the economy and generates jobs.
Quantitative easing, commonly known as large-scale asset purchases, was also carried out by the Federal Reserve. The Federal Reserve used quantitative easing to buy long-term securities, like Treasury bonds and mortgage-backed securities, to lower long-term interest rates and expand the money supply (Maciejewska et al., 2019). Due to the increased credit availability and economic activity this caused, more people could purchase goods and services, ultimately leading to a rise in employment.
The Federal Reserve’s initiatives to lower the federal funds rate and carry out significant asset acquisitions were successful. The US economy expanded at an average rate of 2.3% from 2009 to 2016, following the Great Recession, down from an average of 2.9% from 2002 to 2007 (Blanchard, 2019). Increased consumer, investment, and government expenditure were the main drivers of this expansion. Additionally, the unemployment rate decreased from a peak of 10.0% in October 2009 to 4.7% in May 2016 (Blanchard, 2019). This significantly improved compared to the 6.3% (Blanchard, 2019) unemployment rate before the recession.
Generally speaking, the Federal Reserve’s monetary measures during the Great Recession were successful in resuming economic recovery and lowering unemployment. The unemployment rate dropped to levels not seen since before the recession due to the economy’s recovery in terms of growth and employment levels (Bremer, 2021). However, it’s crucial to remember that while the Federal Reserve’s measures successfully restored economic growth.
Conclusion
In conclusion, the Great Recession of 2008 had a significant impact on the global economy, and it required the coordinated efforts of monetary and demand-side policies to aid in the recovery. To boost economic development, the US government reduced taxes. It expanded spending, and the Federal Reserve decreased the federal funds rate and used quantitative easing to lower long-term interest rates. Although there were still some unfavorable long-term repercussions of the policies, these steps successfully revived economic growth and lowered unemployment. In the end, both monetary and demand-side strategies were successful in helping the US economy emerge from the crisis.
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