Sample Economics Essays on The Great Recession:fiscal and the monetary policies

The Great Recession

This paper discusses the fiscal and the monetary policies adopted and implemented by the Federal Reserve during the great recession and their impacts on the economy of U.S. The great recession is referred to as great because of how long the economy took to recover. The main cause of this was the housing crisis. A recession is said to occur when there is either two or more successive quarters of negative gross domestic product (GDP) increase. Businesses; especially those involved in the private sector which had been in expansion before the recession has had to scale back on production so as to limit exposure to systematic risk (Nickolas, 2018).  Recessions are usually compared to various macroeconomic indicators such as Gross Domestic Product (GDP) decline, and unemployment. Also, other indicators include fall of industrial production, a downturn of stock market indices, and a decrease in trade volumes or real personal income. The great recession led to some harsh realities on the economy of the United States. These include; laying off of workers thereby causing an uprise in the unemployment rate, reduced output in production and low turn-out in the investment in the economy of the United States. For instance, the employment opportunities experienced a decline of 6.7 percent during the great recession. As the economy of the United States experienced the great recession, February 2009 saw the passage of the American Recovery and Reinvestment Act (ARRA), a stimulus package that took the form of fiscal relief for state governments, benefit increases and tax cuts for households, and investments in infrastructure and technology.

The economy of the United States went on a free fall during late 2007 to the third quarter of 2009 due to the great recession. An economic recession can be analyzed from three different views. The first view deals with the causes of recession while the second examines the outcomes of the recession. The last view focuses on how a recession can be predicted. One of the main factors which contributed to the great recession in the United States is the decline in housing prices. Not only that, the financial system at that period was heavily invested in house related assets and mortgage-backed security. Moreover, the shadow banking system was invested in housing assets and highly vulnerable to a bank run. These factors put together contributed to the great recession. The increase and subsequent drop in housing prices might not have had such a large overall effect on the economy if it had not been for the way mortgages were being sold and financed at that period (Grusky, 2011). The shadow banking system was forced to sell its assets at low costs which in turn hindered the ability to intermediate not just house purchases, but investment more generally. With reduced credit, there was a decline in house purchases thereby leading to a reinforcement in house prices.

The Monetary policy is enforced through changes in the money supply and the federal funds rate. The changes in the federal funds rate influence other market interest rates such as mortgage, auto loan, and corporate bond rates. Changes in interest rates, in turn, affect saving and investment decisions. During an economic recession, monetary policy is elastic in that the federal funds rate is down priced which encourages organizations to expand and increase their workforce which will, in turn, offer consumers an incentive to credit and spend more. Monetary policy can encourage aggregate demand by expanding the money supply and thereby lowering interest rates, which increases households’ and firms’ desired spending. The fiscal policy, otherwise, is the duty of majorly the Council and the White House is enacted through amendments in government expenditure and taxation. A variety of tax and spending measures can be put in place by the government in order to stimulate aggregate demand by increasing the amount of spending that households and firms wish to do at any given interest rate. This can be done by reducing taxes which in turn will increase the net spending by consumers. Also, the government can opt to increase its expenditure which will, in turn, lead to an increase in firm productions while at the same time create employment opportunities.

During recessions, the government can decide to pursue policies that stimulate aggregate demand by increasing household expenditure. Although the monetary and fiscal policies are ongoing processes in the United States, the execution of these methods are often under scrutiny when the economy is experiencing any sort of distress. Moreover, the Federal Reserve and the central bank are recognized with sustaining the international economy through financial support. An example of this is when the Federal Reserve decreased the target value of the federal funds rate 10 times, reducing it to a range of zero to 0.25 percent on December 16, 2008, down from 5.25 percent in September 2007. In the year 2008, the Federal Reserve began to intervene in the markets to help banks refund and reorganize themselves. Also, the federal government passed a bill recognized as the Troubled Asset Relief Program (TARP) which sanctioned the use of 700 billion dollars to help resolve the great recession.

 

 

Works Cited

Grusky, D. B., Western, B., & Wimer, C. (2011). The great recession. New York: Russell Sage Foundation.

Nickolas, S. (2018). Why does unemployment tend to rise during a recession? Retrieved from https://www.investopedia.com/ask/answers/032515/why-does-unemployment-tend-rise-during-recession.asp