Part A Fiscal Policy During The Great Recession Research

Part A Fiscal Policy During The Great Recessionresearch The Fiscal Po

Part A: Fiscal Policy During the Great Recession Research the fiscal policy implemented in the US during the Great Recession. Explain the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009. Discuss if these programs are Keynesian or Classical. Please include how increases in aggregate demand through government expenditures and tax cuts (through the multiplier effect) increase GDP in your answers.

Part B: Fiscal Policy During the Covid-19 Recession Research the fiscal policy implemented in the US during the Covid-19 Recession. Explain the CARES Act of 2020 and the American Rescue Plan Act of 2021 (ARPA). Discuss if this program is Keynesian or Classical. Explain the effects of these programs using the AD/AS Model. (e.g. how the shifts in aggregate demand through government programs (through the multiplier effect) change GDP).

Paper For Above instruction

Introduction

The Great Recession of 2007-2009 and the Covid-19 pandemic in 2020-2021 represent two significant economic downturns that prompted substantial fiscal policy interventions in the United States. These policies aimed to stimulate economic activity, preserve jobs, and prevent deeper recessions. Analyzing these fiscal responses involves understanding the specific legislation enacted, their theoretical underpinnings—whether Keynesian or Classical—and the mechanisms through which they impacted aggregate demand and gross domestic product (GDP). This paper examines the fiscal policies during these two crises, focusing on the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009, as well as the CARES Act of 2020 and the American Rescue Plan Act of 2021. It evaluates their effectiveness in terms of economic theory and their influence on aggregate demand using the AD/AS model.

Fiscal Policy During the Great Recession

The Great Recession was marked by a sharp decline in economic activity, a rise in unemployment, and a significant contraction in GDP. In response, the US government implemented expansive fiscal policies designed to stabilize the economy. The primary legislative measures were the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 (ARRA).

The Economic Stimulus Act of 2008 was enacted in February 2008 with the intent to boost economic activity through direct payments to taxpayers and tax cuts for individuals and businesses. The goal was to immediately increase disposable income, thereby encouraging consumer spending and investment. However, its scope was relatively modest compared to later measures and it was more a supplementary stimulus.

In contrast, the ARRA, signed into law in February 2009, was a comprehensive $831 billion fiscal stimulus package. It included increased government spending on infrastructure, education, health care, and energy, alongside extended unemployment benefits and direct payments to households. This multifaceted approach aimed to directly increase aggregate demand by injecting funds into the economy and incentivizing increased consumption and investment.

These policies are rooted predominantly in Keynesian economic theory, which advocates for active government intervention during downturns. Keynesian economics posits that aggregate demand is the primary driver of economic activity and that government spending can directly stimulate this demand during recessionary periods. The use of fiscal stimulus, through both government expenditure and tax cuts, aimed to shift the aggregate demand curve outward, thereby increasing GDP and reducing unemployment.

The multiplier effect plays a crucial role in understanding the impact of these policies. An initial government expenditure or tax cut leads to increased income for recipients who, in turn, spend a portion of their additional income. This successive cycle amplifies the initial stimulus. For example, an increase in government spending on infrastructure projects directly raises GDP, but also induces additional consumption through the increased income of workers and suppliers, leading to a multiplied effect on overall demand.

Empirical studies suggest that the fiscal stimulus during the Great Recession had a positive, albeit modest, effect on GDP growth and employment. The legitimacy of the Keynesian approach in this context is supported by the observed increase in aggregate demand and the subsequent economic recovery, although debates persist about the optimal size and timing of such interventions.

Fiscal Policy During the Covid-19 Recession

The Covid-19 pandemic led to an unprecedented economic shock characterized by sharp declines in consumption, investment, and employment. In response, the US government enacted the CARES Act of 2020 and the American Rescue Plan Act (ARPA) of 2021 to mitigate economic damage.

The CARES Act, enacted in March 2020, was a $2.2 trillion fiscal package that provided direct stimulus payments to individuals, expanded unemployment benefits, and offered loans and grants to businesses, particularly small enterprises. It aimed to sustain household incomes, prevent mass layoffs, and stabilize business operations during the height of the pandemic-induced shutdowns.

Following the ongoing economic challenges, the ARPA was passed in March 2021, infusing an additional $1.9 trillion into the economy. It expanded direct payments, increased funding for vaccine procurement and distribution, extended unemployment benefits, and supported state and local governments. The scale and scope of these measures underscored their emphasis on rapid fiscal intervention to prevent a severe economic downturn.

The Keynesian framework is again evident in these policies, focusing on boosting aggregate demand during a period of demand deficiency and high uncertainty. Both acts aimed to inject liquidity into the economy, support income, and sustain spending—core tenets of Keynesian stimulus policies.

From the perspective of the AD/AS model, these policies shifted the aggregate demand curve to the right, counteracting the leftward shift caused by the pandemic’s adverse effects. The direct transfer payments and expanded unemployment benefits increased disposable income, which in turn stimulated consumption. This multiplier effect magnified the policy impact, leading to a rise in GDP and a gradual recovery of employment levels.

However, critics argue that such expansive fiscal measures risk increasing deficits and debt levels without guaranteeing a proportional economic return. Nevertheless, the experience from the Covid-19 response suggests that timely, large-scale fiscal stimulus can effectively stabilize aggregate demand during extraordinary shocks, reducing the severity and duration of recessions.

Comparative Analysis and Theoretical Perspectives

Both sets of policies—during the Great Recession and the Covid-19 pandemic—are rooted mainly in Keynesian economics, emphasizing the importance of government expenditures and tax cuts to boost aggregate demand. They contrast with classical economics, which advocates for minimal government intervention and reliance on market forces.

The Keynesian approach posits that during downturns, private sector activity declines, and public spending is necessary to fill the demand gap. Fiscal policy, through government spending and tax cuts, shifts the aggregate demand curve outward, resulting in higher output and employment. The multiplier effect further enhances this impact, making fiscal stimulus an effective tool during recessions.

Conversely, Classical economics argues that markets tend to self-correct through flexible prices and wages, and that government intervention may distort markets. Classical proponents are skeptical of large fiscal stimuli, fearing inflationary pressures and long-term debt implications. They believe that supply-side reforms and monetary policy are more effective in restoring equilibrium over time.

Both the Great Recession and Covid-19 stimulus measures demonstrate that Keynesian fiscal policy can be essential in managing cyclical downturns, especially when private sector demand is insufficient. These interventions successfully shifted aggregate demand, increased GDP, and mitigated unemployment, underscoring the importance of fiscal policy as a macroeconomic stabilizer.

Conclusion

The fiscal policies enacted during the Great Recession and the Covid-19 pandemic reflect Keynesian principles emphasizing active government intervention. The Economic Stimulus Act of 2008 and the ARRA of 2009 aimed to stimulate demand through direct expenditure and tax cuts, leveraging the multiplier effect to amplify their impact. Similarly, the CARES Act and ARPA worked to support income and consumption during the unprecedented shock of the pandemic. Both sets of policies effectively shifted aggregate demand rightward, as illustrated by the AD/AS model, leading to increases in GDP and employment. While debates about long-term fiscal sustainability persist, these interventions underscore the importance of Keynesian fiscal policy in stabilizing economies during severe downturns.

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