American Public University
June 27, 2014
Investopedia defines a recession as a significant decline in activity throughout the economy; it will last much longer than a few months. It becomes apparent in industrial production, employment, real income and wholesale-retail trade. The indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP) these indicators were present in the economy in 2008, leading the United States as well as other countries into recession. (Economic Recession, 2015). The federal government focused on demand side policies as a tool to help the United States economy to turn around. Demand side policies such as fiscal policies which means changing taxation and government spending in addition to monetary policy essentially means the government changes interest rates and money supply were some of the demand-side policy initiatives the government used. This author will attempt to make some type of logical sense of demand side monetary policy even though the writer of this paper disagrees with much of the information related to the government’s monetary activities in relation to the economy.
During the Great Recession of 2008, the government adopted demand-side aggregate demand stimulus strategies. These strategies include both fiscal and monetary policies that provide the stimulus in the economy. The fiscal policies were employed by making tax cuts and by increasing government spending. The thought is that with tax cuts to citizens this would increase consumer spending because lowering taxes will increase a person’s disposable income thus increasing consumption which then leads to a higher aggregate demand. Fiscal policies have the potential to decrease unemployment by increasing the aggregate demand and the overall rate of economic growth. When the aggregate demand increases there most likely will be an increase in real gdp. Businesses will produce more goods which mean there would be an increase in demand for employees which will the lower unemployment. (Carvalho, Eusepi, & Grisse, 2012) Another plus, with high aggregate demand in addition to economic growth, fewer businesses will go under and cease operations. Keynes was an advocate of expansionary fiscal policy during a prolonged recession. He argued that in a recession, resources are idle; therefore the government should intervene and create additional demand to reduce unemployment. (Pettinger, 2011). During the great recession of 2008 the government enacted the Economic Stimulus Act of 2008 worth 152 billion dollars. There was a tax rebate of up to 1200 dollars per family. There were also tax incentives for business investments. In February 2009 the government did the American Recovery and Reinvestment Act of 2009 valued at 787 billion dollars. This gave a tax credit of up to 800 dollars per family. There was even more tax incentives for business investments as well as aid to state and local governments. (Romer, 2013).
The Federal Reserve was quite busy in 2008. According to their website they were consistently offering an incentive or credit of some sort. For example July 14 n2008 the Federal Reserve offered 75 billion in a 28 day credit through its Term Auction Facility. On September 14th they released a statement saying that there would be several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities. (Reserve, 2008).
Monetary policy involves cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest. This increases aggregate demand and helps to increase GDP and reduce demand deficient unemployment. Lower interest rates will also reduce the exchange rate and make exports more competitive. Sometimes though lowering the interest rates does not work to raise the…