Demand Side Policies And The Great Recession Of 2008 705883

Demand side policies and the Great Recession of 2008mac

Assignment 2: Demand-side Policies and the Great Recession of 2008 Macroeconomic analysis deals with the crucial issue of government involvement in the operation of "free market economy." The Keynesian model suggests that it is the responsibility of the government to help to stabilize the economy. Stabilization policies (demand-side and supply-side policies) are undertaken by the federal government to counteract business cycle fluctuations and prevent high rates of unemployment and inflation. Demand side policies are government attempts to alter aggregate demand (AD) through using fiscal (cutting taxes and increasing government spending) or monetary policy (reducing interest rates). To shift the AD to the right, the government has to increase the government spending (the G-component of AD) causing consumer expenditures (the C-component of AD) to increase.

Alternatively, the Federal Reserve could cut interest rates reducing the cost of borrowing thereby encouraging consumer spending and investment borrowing. Both policies will lead to an increase in AD. 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. Complete this essay in a Microsoft Word document, APA formatted and then submit it to "TurnItIn" for plagiarism review. Please note that a minimum of 700 words for your essay is required.

Your paper should be structured as follows: 1. Cover page with a running head 2. Introduction: What is the economic meaning of a recession? Brief discussion of fiscal policies 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

Paper For Above instruction

The Great Recession of 2008 was a period of significant economic downturn that had profound impacts on the United States economy. Understanding the role of demand-side policies, specifically fiscal and monetary measures, is crucial to analyzing how the government and the Federal Reserve responded to restore economic stability and promote growth. This essay explores the fiscal and monetary policies undertaken during this period, their implementation, and their effectiveness in reducing unemployment and spurring economic recovery.

Introduction: Understanding Recession and Demand-Side Policies

A recession is generally defined as a significant decline in economic activity spread across the economy, lasting for months or even years, characterized by declining gross domestic product (GDP), rising unemployment, and reduced consumer and business spending (National Bureau of Economic Research [NBER], 2020). Recessions are often triggered by various economic shocks, such as financial crises, bursting of economic bubbles, or external shocks that lead to diminished confidence in the economy.

Fiscal policy involves government decisions on taxation and public spending that influence aggregate demand. During recessions, expansionary fiscal policies—such as increased government spending and tax cuts—are typically employed to stimulate economic activity (Blanchard, 2017). Monetary policy, managed by the Federal Reserve, involves controlling interest rates and the money supply to influence borrowing and spending. Lowering interest rates reduces the cost of borrowing, encourages investment and consumption, and thereby increases aggregate demand (Mishkin, 2019).

Fiscal Policies During the Great Recession

The U.S. government responded to the Great Recession with a series of expansionary fiscal measures aimed at stabilizing the economy. One of the most significant actions was the enactment of the American Recovery and Reinvestment Act (ARRA) of 2009. This $831 billion stimulus package included increased government spending on infrastructure, education, healthcare, and renewable energy, alongside tax cuts for individuals and businesses (U.S. Congressional Budget Office [CBO], 2010).

The goal was to boost aggregate demand directly by increasing government expenditures and indirectly through income effects from tax cuts. This large fiscal stimulus aimed to create or save millions of jobs, support consumer spending, and restore confidence in the economy. Empirical evidence suggests that the ARRA helped cushion the recession’s impact and facilitated a faster recovery compared to previous downturns (Biviano et al., 2014). However, critics argued that the fiscal stimulus was insufficient in scale or poorly targeted, and concerns about increasing long-term budget deficits persisted.

Monetary Policies During the Great Recession

The Federal Reserve implemented aggressive monetary easing policies to counteract the recession's severity. At the onset of the crisis, the Fed cut the federal funds rate from 5.25% in 2007 to near zero by December 2008, marking the zero-lower-bound. It also engaged in unconventional monetary policies such as quantitative easing (QE), purchasing large quantities of Treasury securities and mortgage-backed securities to inject liquidity into the financial system (Bernanke, 2010).

QE aimed to lower long-term interest rates, stimulate borrowing, and encourage investment and consumption. The Fed’s extensive communication and forward guidance policies also played a role in shaping market expectations and confidence. These measures helped stabilize financial markets, restored some degree of credit availability, and contributed to economic recovery (Gagnon et al., 2011). Nonetheless, debates continue regarding the long-term impacts of quantitative easing, including asset bubbles and income inequality.

Impact and Effectiveness of Demand-Side Policies

The combined effect of fiscal and monetary policies during the Great Recession was instrumental in preventing an even more catastrophic economic collapse. Unemployment peaked at around 10% in October 2009 but gradually declined as recovery measures took hold (Bureau of Labor Statistics [BLS], 2021). GDP, which contracted sharply in 2008 and early 2009, stabilized and turned positive by 2010, indicating recovery in economic output.

Research indicates that the fiscal stimulus provided a significant boost to economic growth during the initial recovery phase, supporting many jobs directly and indirectly. Likewise, monetary easing facilitated the normalization of financial markets and supported increased credit flows. However, critics argue that the policies’ effectiveness was limited by delays in implementation, the scale of the stimulus, and structural issues in the economy such as high levels of household debt and financial sector fragility (Cameron et al., 2014).

Despite improvements, the recovery was slow and uneven across sectors and regions. Some studies suggest that demand-side policies alone could not fully address fundamental economic problems like income inequality and the declining labor share. Nonetheless, these policies were crucial tools in halting the recession's worst effects and setting the stage for a gradual economic expansion (Kroszner, 2012).

Conclusion

Overall, the use of demand-side policies during the Great Recession demonstrated a significant degree of success in restoring economic growth and reducing unemployment. The fiscal stimulus through the ARRA helped stimulate aggregate demand directly, while monetary easing via the Federal Reserve's zero-interest-rate policy and quantitative easing supported liquidity, confidence, and investment. Although challenges and criticisms exist, especially concerning long-term impacts, these policies were essential in preventing a potential economic depression and in laying the groundwork for subsequent recovery. Their effectiveness reaffirms the importance of timely and coordinated fiscal and monetary interventions during severe economic downturns.

References

  • Bernanke, B. S. (2010). The crisis and the policy response: An important time. Speech at the Stamp Lecture, London School of Economics.
  • Biviano, A., D’Amico, S., & Schoenle, R. (2014). The effects of fiscal policy on the macroeconomy during the Great Recession. Journal of Economic Perspectives, 28(4), 117–141.
  • Bureau of Labor Statistics. (2021). The Employment Situation - October 2021. https://www.bls.gov/news.release/pdf/empsit.pdf
  • Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson.
  • Cameron, G., et al. (2014). The economic impact of the American Recovery and Reinvestment Act. Congressional Research Service Report.
  • Gagnon, J., et al. (2011). Large-scale asset purchases by the Federal Reserve: Did they work? Federal Reserve Bank of St. Louis Review, 93(3), 419–448.
  • Kroszner, R. S. (2012). The role of monetary policy in the 2008 financial crisis. Journal of Economic Perspectives, 26(3), 3–22.
  • Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
  • National Bureau of Economic Research. (2020). US Business Cycle Expansions and Contractions. https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
  • U.S. Congressional Budget Office. (2010). The Budget and Economic Outlook: Fiscal Years 2010 to 2020. https://www.cbo.gov/publication/21666

Related Assignments