Fiscal Policy Between 2007 and 2009 the

Fiscal Policy Between 2007 and 2009 the U.S. economy experienced a severe recession. In an effort to stimulate the economy, the federal government passed a stimulus package. Explain the federal government's use of fiscal policy (the stimulus) to promote growth and employment. Support your ideas with concepts found in the assigned reading. Include the following in your response: Government spending can contribute a significant amount of economic activity into the economy. When the government purchases goods and services then this money is injected into the economy.

The purchased goods create or sustain jobs that keep people employed. The stimulus can also be used to provide public goods and social services that provide for the less fortunate in society. When the government injects tax money back into the economy then there is a multiplier effect.

As a result of the multiplier effect, small changes in investment or government spending can create much larger changes in total output; a positive aspect of the multiplier effect is that macroeconomic policy can effect substantial improvements with relatively small amounts of autonomous expenditures; a negative aspect is that a small decline in business investment can trigger a larger decline in business activity and, thereby, create instability (Investopedia, N.d.).

Discuss some actions taken by the federal government and whether the recession would have been longer and the unemployment rate higher if the government had not acted by passing the stimulus package? The federal stimulus package target many different types of individuals and businesses. For example, first time homebuyers were given a tax credit that significantly helped to stabilize the real estate market. If the government would not have acted to help stabilize the economy, then the recovery would have likely taken much longer to manifest.

However, the federal government used its purchasing power and aid packages to accelerate the economy and mitigate any further damages; especially by saving some of the firms in the financial industry. If left alone, do you believe the economy would have corrected itself as suggested by Classical economic theory? Explain. I do not believe the economy would have rebounded; at least very quickly. For example the failure of AIG would have toppled many other businesses that were counting on them staying solvent.

The failure of the banks could be viewed as a systemic failure and the system stood the potential of completely collapsing. One of the primary factors has been argued to be the entanglement of the banks' balance sheets that can be traced back to the dismantling of the Glass-Steagall Act (Lopes, 2010). Discuss the effect these policies had on increasing the size of the budget.