Great Recession and Economy

Demand-Side Policies and the Great Recession

A recession can be delineated as a substantial deterioration in activity across the economy that persists for a period exceeding a few months. This significant decline can be perceived in business production, employment, real income, and retail trade (Investopedia, n.d). Fiscal policy refers to the use of government expenditure and taxation to regulate the aggregate level of economic activity. On the other hand, monetary policy can be delineated as one of the public interventionist measure purposed at impelling the level and pattern of economic activity to attain particular desired objectives. Monetary policy can be said to encompass all actions undertaken by the central bank and the government, which influence the quantity, cost and availability of money and credit in the economy (Colander and Gambler, 2006). The purpose of this paper is to discuss the fiscal and the monetary policies adopted and implemented by the Fed during the Great Recession and their impacts on the U.S. economy.

The Great Recession commenced towards the end of the 2007 financial year and culminated in mid-2009, which made it the longest recession experienced in the United States since the Second World War. The unemployment rate increased from 5% in 2007 to about 10% in 2009. Secondly, the Real gross domestic product (GDP) decline 4.3% from its highest in the last financial quarter of 2007 to its trough in the second financial quarter of 2009, which was the biggest deterioration since World War II. In turn, fiscal and monetary policies were carried out to enhance the state of the economy (Blinder and Zandi, 2010).

Fiscal Policies

The fiscal stimulus packages carried out in the course of the great recession of 2008 consisted of a combination of government spending increases and tax cuts. These measures were intended to stabilize economic activity and inflation by stimulating aggregate spending. An upturn in government spending has a direct influence on the economy by prompting greater demand for goods and services. The subsequent increase in income and employment also provides an incidental influence by instigating higher private consumption, as households and companies attain greater purchasing power (Carvalho et al., 2012). A fiscal stabilization plan set out by the Obama administration through the American Recovery and Reinvestment Act encompasses the appropriation of $787 billion, which consisted of $288 billion in tax reductions and benefits to individuals and companies, over $200 billion in entitlements and $275 billion in contracts and loans (Tcherneva, 2011). In addition, the Fed lowered the target value of the federal funds rate by about ten times. This caused the decrease in the rates of the federal funds from 5.25% in 2007 to 0.25% in the following financial year

Monetary Policies

The Federal Reserve took several monetary policy measures to tackle the recession and improve the United States economy. To begin with, the Fed expanded its balance sheet policies to decrease the cost and enhance the accessibility of credit to households and businesses. Another measure of note was 'quantitative easing'. This results in an increase in money supply and purchasing bonds to maintain the rates of bonds at a low level. The anticipated outcome is that the increase in the money supply and the decreased interest rates will augment investment and economic activity. Another policy decision was that of large-scale asset purchase programs. These programs were carried out to facilitate a decline in longstanding public and private borrowing rates. The expansion consisted of the purchase of long-term securities in the open market; in particular, the purchase of longer-term Treasury securities and mortgage-backed securities allotted by government-sponsored establishments. These measures have been beneficial in improving the economy as it decreased the cost of long-term borrowing for households and businesses, particularly by decreasing mortgage rates for home acquisitions and refinancing. The general size of the Fed's balance has grown more than two-fold to surpass the $2 trillion mark (Rudebusch, 2009). With the federal funds rate at the zero bound and the existing recovery sluggish and reluctant, the Fed's monetary policy strategy has gone on to progress in an endeavor to stimulate the economy and accomplish its constitutional decree. As the recession subsided, the Fed went on to readjust its communication policies and to execute extra LSAP programs. These consisted of a purchase program for treasuries worth $600 billion in the 200-fiscal year. This was referred to as Quantitative Easing 2. An additional program is the result-based purchase program that started about September 2012 (Rich, 2014). quantitative easing helped stem the spread of the recession.