From the analysis by my peer, the 2007-2008 recession was the longest recession since the Great Depression of the 1930s. The recession led to a financial crisis, a decline in GDP by approximately 4.7% from its peak and doubling of the unemployment rate from 5 % in 2007 to 10% in 2009. To recover from the recession, the Federal Reserve implemented expansionary monetary policy and the Congress implemented expansionary fiscal policies. The policies were identified by my peer and my opinions are as below.
Monetary Policy.
The Federal Reserve is tasked with the responsibility of enacting monetary policy. During the 2007-2009 recession, the feds reduced the federal funds rate to almost zero. A reduction in the federal funds rate resulted in the reduction of the interest rate. With reduced interest rate, consumption and investment spending increased hence aggregate demand increased. Increased demand lowered the unemployment rate because supply increased to cater for the increased demand. Therefore, reduced federal funds rate promote maximum employment growth. The policy was successful in shaping recovery efforts.
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Fiscal Policy.
The Congress is tasked with the responsibility of enacting fiscal policies. During the 2007-2009 recession, the Congress enacted various fiscal stimulus programs to revive the economy such as the Troubled Asset Relief Program (TARP), the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 (ARRA). Expansionary fiscal policy is often adopted during a recession, the government increases its spending in key sectors such as health and education and reduces taxes hence aggregated demand increases. With an increase in demand, firms hire more workers hence the unemployment rate decreases. In addition, increased government spending also increases production. Increase in production leads to an increase in GDP hence economic growth. In general, economists believe expansionary fiscal policy contributes to economic development.
References
Federal Reserve Bank of St.Loius. (2011). Economic Information Newsletter
Carvalho, C., Eusepi, S. & Grisse, C. (2012). Policy initiatives in the global recession: What did forecasters expect?
