Economic recession refers to economic decline, which is accompanied by a decrease in the stock market, a rise in unemployment, and a reduction in the housing market. Blame for the occurrence of an economic recession is associated with the leadership of federal government either the president, head of Federal Reserve, or the administration of the Federal department. Economic downturn can be caused by high rates of interests, reduction of consumer confidence, and reduction of real wages. The significant economic downturn of 2007 and 2008 was caused by irrational and weak lending policies of the financial industry which caused many individuals to purchase houses they did not require because they thought housing prices would continue to rise. Hedge funds and banks faced huge losses on secondary markets. This made the government of the USA to bail out $700 billion to save various financial institutions from bankruptcy (Challet, Solomon & Yaari, 2008). Employment in the country declined at a higher rate, and this made the USA fall in a significant economic recession. The federal government of the USA implemented and adopted fiscal and monetary policies to handle the situation of economic downturn.
Fiscal policy refers to the utilization of tax policy and government spending to determine the economic path over time. The federal government of the USA implemented and adopted both expansionary fiscal policies to handle the problem of the economic recession of 2008 in the country. Expansionary fiscal policy increased aggregate demand level by rising government spending and reducing rates of taxes in the country. Expansionary policy ensured the increase of federal government spending on producing goods and services and increasing federal grants to local and state governments in the country to raise their expenditures on providing products and services (Kolb, 2010). The federal government of the USA increased the rate of consumption through increasing disposable income by cutting taxes of individual salaries and payroll taxes. The government reduced business taxes to increase after-tax profits, which in turn increased expenditure on investments. Increase in business increased the rate of employment in the country, increasing individual and business incomes. The federal government changed taxation levels and spending to influence aggregate demand level in the country. This increased consumption in the country is raising the economy of USA.
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Implementation and adoption of fiscal policy by the Federal government of the USA reduced inflation stimulated economic growth and stabilized the acquired economic growth. This was achieved because the fiscal policies through the use of decreasing individual and business taxes and increase of government spending changed and increased the aggregate demand in the country and increased the rate of employment in the country. Implementation of fiscal policies by the federal government made government spending to increase from 19.6% of GDP in 2007 to 24.6% of GDP in 2009 (Latham & Braun, 2008). Tax revenues in the country reduced from 18.5% in 2007 to 14.8% in 2009. The potential GDP of the country increased, which in turn led to a rising price level of commodities.
Monetary policy refers to the attempt to manage macroeconomic variables by setting rates of interest. The federal reserve of the USA implemented aggressive financial approaches to avoid the economic recession from becoming more devastating in the country. The Federal Reserve had two primary objectives when implementing its monetary policies. The Federal Reserve aimed at supporting market functioning and liquidity and pursuing macroeconomic bank objects. In September 2007 and March 2008, the federal bank reviewed its rate of federal funds severally starting with its price of target national fund which was 4.75% in September 2007 and reduced it to 2.25% in March 2008 (Palley, 2011). The discount rate was also reduced from 5.25% in September 2007 to 2.5 in March 2008. Also, the federal bank developed various adjustments to its reserve requirements, which influenced the change in money supply in the country. The reserve requirements exemption was continuously reviewed, permitting for massive deposit amounts to be withheld by banks in the county without holding a reserve.
The federal bank also raised the low reserve tranche level thus permitting various banks to lie in the category of needing 3% of their deposits held in reserves compared to that of 10% for the banks which exceeded low reserve tranche level (Chodorow-Reich et al., 2012). This made the Federal Reserve raise money supply in the country. Reduction of discount rate in federal banks increased the money supply and liquidity in financial institutions and financial markets. Modification of level of reserve requirements of financial institutions through the increase of the level of minimum deposit and rise of the level of low reserve tranche made the Federal Reserve raise money supply in financial markets by 4. 164 Trillion USD (Beaton, Lalonde & Luu, 2009). Implementation and adoption of the monetary policies by the federal government improved the country’s GDP, raising it from -2.8% to 2.51%. This indicated signs of the country recovering from the economic recession.
Implementation and adoption of monetary and fiscal policies by the federal government of the USA have helped in restoring the economy of the country. Use of monetary policy to reduce the level of low reserve tranche in financial institutions facilitated the increase of money supply into the financial institutions and commercial markets. Also, the use of monetary policies to reduce the rate of discounts increased liquidity and money supply in financial institutions as well as increasing the country’s GDP. Application of fiscal policies reduced inflation and stimulated economic growth in the USA. Increase of government spending on business investments increased the rate of employment and aggregate demand, which increased the country GDP. Implementation of monetary and fiscal policies in the economic recession led to economic recovery and increased economic growth in the country.
References
Beaton, K., Lalonde, R., & Luu, C. (2009). A financial conditions index for the United States (No. 2009-11). Bank of Canada Discussion Paper.
Challet, D., Solomon, S., & Yaari, G. (2008). The universal shape of economic recession and recovery after a shock . Available at SSRN 1309462.
Chodorow-Reich, G., Feiveson, L., Liscow, Z., & Woolston, W. G. (2012). Does state fiscal relief during recessions increase employment? Evidence from the American Recovery and Reinvestment Act. American Economic Journal: Economic Policy, 4(3), 118-45.
Kolb, R. W. (2010). Fiscal policy for the crisis. Lessons from the Financial Crisis, 587.
Latham, S. F., & Braun, M. R. (2008). The performance implications of financial slack during economic recession and recovery: observations from the software industry (2001-2003). Journal of Managerial Issues, 30-50.
Palley, T. (2011). America’s flawed paradigm: macroeconomic causes of the financial crisis and great recession. Empirica, 38(1), 3-17.
