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The Impacts of Fiscal and Monetary Policies in Mitigating Economic Recession
Introduction
The United States has encountered many incidences of recession since the end of World War II. However, the Great Recession, which suppressed the countrys economy, occurred throughout 2008 until June 2009. The financial crisis severely traumatized employees in industries, household livelihood, and routine production activities (Gertler & Gilchrist, 2018). Normally, the occurrence of recessions has been counteracted synergistically using fiscal and monetary policies.
The acts are readily available for implementation in the event of a financial crisis in the United States. Public expenditure occurs both at the state and local administrative levels in the nation, in which loaning, and lending of money are barred. Moreover, downscaling of returns on taxation initiates a reduction in the cash outflow for operating businesses (Pham, 2017). Therefore, this paper discusses fiscal and monetary policies adopted and implemented to circumvent the 2008 Great Recession impacts in the United States.
The Meaning of Economic Recession
Economic recession refers to the collapse of business opportunities, which leads to the loss of potential consumers of goods and services in the market. As a result, the impacted nations experience a sharp decline in revenue returns, thereby yielding a financial crisis. It is associated with correlations existing between banks, households, and industrial activities. The components of a household in an economy consist of housing and rents generated from accommodation charges as assets (Gertler & Gilchrist, 2018). Conversely, banks assets in an economy are loans given to companies and housing firms to invest in their businesses.
Therefore, debts stemming from house rents and construction deficits results to financial crisis in the banks and reflects on the balance sheet. For instance, the Great Recession of 2008 originated from the increase in lending of mortgages and escalation of housing prices. Eventually, the interest of consumers in purchasing houses reduced, thus, the banks balance sheets were subjected to the inconsistency of returns from their assets (Gertler & Gilchrist, 2018). It implies that the financial crisis which results in economic recession stems from the inability of consumers to afford products and services in the market.
The Fiscal Policies
Business policies are instrumental in establishing a long-lasting and reliable economy in a nation, thus, providing an environment for development. The fiscal policies are a component of macroeconomic acts that focuses on how public funds are spent and revenues are returned (Adegoriola, 2018). Its legislations permit the government at every administration level to take part in socio-economic activities by regulating the overall demand and supply in the market.
Consequently, it becomes possible to create employment opportunities for citizens to eradicate poverty. Moreover, the legislation allows for the tax cut to stimulate peoples commitment to running businesses to sustain the economy. In addition, fiscal policies are essential in reducing public debts and eliminating fluctuations occurring in the banks balance sheets due to high deficits (Ball et al., 2017). Thus, Federal fiscal policies act as the stabilizer of an economy and a promoter of development through business productions.
The Monetary Policies
Monetary policies are macroeconomic legislations implemented by the central bank of a country to regulate money supply discretionarily. For instance, the United States Federal Government uses conventional monetary acts centered towards establishing economic stability through the standardization of prices (Adegoriola, 2018). Essentially, it eliminates inflation and controls exchange rates between commodities, thus, balancing payment and creating employment opportunities.
On the other hand, unconventional monetary policies are used in the United States, such as quantitative easing implemented by the central bank. The act entails altering the contents of the central banks balance sheet to unveil liquidity and enhance market credit conditions. For instance, the Federal government purchased $100 billion and $500 billion Government Sponsored Enterprise debt and Mortgage-Backed Security during the Great Recession (Pham, 2017). Thus, the monetary policies were significant in curbing the financial crisis during the Great Recession.
The Impact of Demand-Side Policies
The Demand-Side policies provided mechanisms of lowering interest rates. For example, with the purchase of public debts by the Federal Government, interest rates were reduced. Thus, it encouraged the citizens to invest. As a result, many business activities were generated, which eventually increased the Gross Domestic Product of the United States (Kuttner, 2018). Thus, economic growth was realized after the Great Recession.
The cutting taxes also translated to an increase in revenue; thus, there was a rise in public expenditure towards infrastructural development. In return, employment opportunities emerged for the citizens to run small businesses and industrial production activities (Ball et al., 2017). It implies that the demand side policies encouraged trading in the United States and at the international level, thereby stabilizing the nations economy.
Conclusion
Economic recession creates a financial crisis which acts as a drawback to the development of a country. Therefore, strategies to circumvent its impacts are essential at both local and national levels. The fiscal and monetary policies have been used in the United States in the event of a recession. During the Great Recession, the policies provided for tax reduction and increment in public expenditure, which restored economic stability, and increased employment for the citizens.
References
Adegoriola, A. E. (2018). An empirical analysis of effectiveness of monetary and fiscal policy instruments in stabilizing economy: Evidence from Nigeria. Social Sciences, 7(3), 133-140. Web.
Ball, L., DeLong, J. B., & Summers, L. H. (2017). Fiscal policy and full employment. In E. Alvi (Ed.), Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy (pp. 85-106). Upjohn Institute for Employment Research. Web.
Gertler, M., & Gilchrist, S. (2018). What happened: Financial factors in the Great Recession. Journal of Economic Perspectives, 32(3), 3-30. Web.
Kuttner, K. N. (2018). Outside the box: Unconventional monetary policy in the great recession and beyond. Journal of Economic Perspectives, 32(4), 121-146. Web.
Pham, L. P. (2017). Was monetary policy the most effective tool to tackle the great recession? A look at fiscal policy as an alternative solution [Unpublished Honors thesis]. Franklin and Marshall College.
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