Demand-Side Policies and the Great Recession of 2008

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Demand-Side Policies and the Great Recession of 2008

The United States employed fiscal and monetary policies to respond to the Great Recession of 2008. The Federal Reserve, Congress, and Bush and Obama administration responded well to the financial meltdown. The fiscal policy entailed an increase in government spending coupled with tax cuts. The fiscal policy spurred economic growth and cushioned the United States from inflation. The Federal Reserve bought the nonperforming assets of the private financial institutions in order to cushion the banks from the deflationary pressure. The demand-side policies spurred economic recovery and prevented the US economy from crumbling during the Great Recession of 2008.

Recession refers to massive decline economic activity in two successive quarters leading to contraction in volume of production. The decline is visible in industrial production, trends in employment, real income, and real Gross Domestic Product (Nagle, 2010). Essentially, the length and depth of a recession tend to affect the economic well-being of any countries. Governments attempt to mitigate the recession by adopting and implementing fiscal, as well as monetary policies. Nagle (2010) argues that the goal of the fiscal policy is to regulate the economy by controlling inflation, improving the rate of unemployment, and positively influencing interest rates. In contrast, monetary policy encompasses the action taken by central bank or regulatory committees to attempt to determine size and rate of the circulation of money (Carvalho, Eusepi and Grisse, 2012). In effect, the central bank maintains monetary policy through increment in interest rates and controlling the amount of bank reserves. The great recession of 2008 compelled the federal government to adopt and implement the demand-side policies in order to rescue the economy.

The federal government response to the Great Recession encompassed unprecedented adoption and implementation of the monetary and fiscal policies. Carvalho, Eusepi, and Grisse (2012) argue that the United States adopted a multifaceted approach to avert a financial crisis. Congress, Federal Reserves, as well as, two administrations played a key role in reversing the negative effects of the Great Recession. The fiscal policy adopted to control the burgeoning recession involved increase in government spending coupled with tax cuts. Fundamentally, the fiscal stimulus aimed at stabilizing the inflation and economic activity by stimulating the aggregate expenditure. Carvalho, Eusepi, and Grisse (2012) contend that the rise in income and jobs tend to enhance private consumption by indirectly giving households and firms a huge purchasing power.

The Bush administration came up with Troubled Asset Relief Program that allowed Federal Reserve to purchase nonperforming financial assets of the private banks. Carvalho, Eusepi, and Grisse (2012) observe that the Treasury and Federal Reserve bought the financial assets from the private banks. The Obamas administration effected the fiscal policy through the President Obamas American Recovery and Reinvestment Act of 2009. The policy involved the appropriation of additional funds to cater for tax cuts and benefits to firms, as well as individuals. Similarly, the White House came up with Emergency Unemployment and Temporary Assistance to Need Families programs that aimed at reversing the effects of the Great Recession.

The monetary policy taken by the Federal Reserve included the lowering of the interest rates. Blinder and Zandi (2010) observe that the Federal Reserve attempted to lower the interest rates while adopting a policy that promoted zero-rating of interest. Carvalho, Eusepi, and Grisse (2012) observe that the bank purchased Treasury bonds and Fannie Mae mortgage-backed securities with the aim of cutting the long-term interest rates. Blinder and Zandi (2010) assert the Federal Deposit Insurance Corporation (FDIC) was instrumental in increasing the deposit insurance limits. The operations by the Federal Deposit Insurance Corporation and Federal Reserve sought to put downward pressure especially on the long-term interest rates to facilitate households and business to borrow funds (Romer and Bernstein, 2009). Therefore, the monetary policy adopted spurred aggregate demand, as well as real economic activities.

The efforts to expand the Federal Reserves balance sheet kept the rates of unemployment from rising during the Great Recession. Notably, the expansionary fiscal and monetary policies shaped the expectations of economic recovery in the United States (Romer and Bernstein, 2009). In effect, the policies effectively prevented deflationary pressures during the financial meltdown. The Federal Reserve succeeded in lowering the interest rates, and increasing the money supply during the severe economic downturn. Presumably, the demand-side policies contributed to a faster recovery from the Great Recession. In effect, the Federal Reserve aggressively cushioned the US economy from inflation. In essence, the fiscal and monetary policies have spurred the economic growth by preventing deflationary pressures.

In conclusion, the fiscal and monetary policies adopted and implemented by Federal Reserve during the Great Recession effectively cushioned the US economy from crumbling. Although unemployment remains an unresolved issue in the United States, the demand-side policies prevented the rate of jobless from rising during the financial downturn. The fiscal policy stabilized the expectations of the economic recovery. The Troubled Asset Relief Program was crucial in creating stability of the financial systems. The huge spending on the infrastructure is expected to create jobs, and lower the percentage of the unemployment in the United States.

References

Blinder, A. & Zandi, M. (2010). How the Great Recession was brought to an end. Web.

Carvalho, C., Eusepi, S., & Grisse, C. (2012). Policy initiatives in the global recession: what did forecasters expect. Current Issues in Economics and Finance, 18 (2), 1-11.

Nagle, J. (2010). How a recession works. New York: Rosen Pub.

Romer, C. & Bernstein, J. (2009). Impact of the American Recovery and Reinvestment Plan. Web.

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