Starting in 2008, the United States experienced the greatest economic calamity since the Great Depression. To combat rising unemployment, negative economic growth, and deflation, among other problems, the U.S. government employed instruments/policies from both the fiscal and monetary toolkits. Write an essay 1,250-1500 words regarding the impact of economic policy on the market. Address the following:
1. Describe the major problems of the “Great Recession.” What required immediate government action, from the perspective of many public officials?
2. Monetary policy: Describe how the Federal Reserve respond to the crisis. Be sure to discuss interest rates and open market operations.
3. Fiscal policy: Describe Congress’s response to the crisis. Be sure to discuss the American Recovery and Reinvestment Act of 2009.
4. Explain the goals of the fiscal and monetary policies employed. Address “stimulating aggregate demand” and the role of “increasing the money supply” in your response.
5. Evaluate the success in the policies.
Use two to three scholarly resources to support your explanations.
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Title: Economic Policy Response to the Great Recession: A Comprehensive Analysis
Introduction:
The Great Recession that unfolded in 2008 presented significant challenges for the United States, leading the government to employ a combination of fiscal and monetary policies as tools to combat unemployment, negative economic growth, deflation, and other pressing issues. This essay aims to analyze the impact of economic policy on the market during this period in order to understand the major problems of the Great Recession, government actions taken to address the crisis, the goals of the implemented fiscal and monetary policies, and evaluate their overall success.
1. Major Problems of the Great Recession and Immediate Government Action:
The Great Recession was characterized by extensive job losses, declining economic growth, crumbling housing market, financial sector instability, and deflationary pressures. The immediate government action was deemed necessary to alleviate the dire consequences of the crisis by restoring confidence, stabilizing the financial system, and reviving economic growth. These actions included the implementation of both fiscal and monetary policies.
2. Federal Reserve's Response to the Crisis:
In response to the economic downturn, the Federal Reserve (Fed) took several measures to mitigate the impact of the crisis. The Fed drastically reduced the target federal funds rate to near zero, bringing down interest rates for various financial products. By cutting interest rates, the Fed aimed to stimulate spending and investment, as lower borrowing costs incentivize businesses and consumers to borrow and spend. Moreover, the Fed implemented open market operations, expanding its balance sheet through the purchase of long-term securities. These actions increased the money supply in the economy and aimed to provide the necessary liquidity to financial institutions.
3. Congress's Response to the Crisis and the American Recovery and Reinvestment Act of 2009:
Congress responded to the Great Recession by enacting the American Recovery and Reinvestment Act (ARRA) of 2009, a large scale fiscal policy measure aimed at stimulating the economy. The ARRA involved a government spending package worth $787 billion, primarily directed towards infrastructure projects, tax cuts, and providing aid to states, among other initiatives. The primary objective of the ARRA was to boost aggregate demand by injecting money into the economy, creating jobs, and spurring economic growth.
4. Goals of Fiscal and Monetary Policies:
The fiscal and monetary policies employed during the Great Recession aimed to generate a positive impact on the market by addressing various economic issues. One of the primary goals of both policies was to stimulate aggregate demand. Fiscal policies sought to achieve this by injecting money into the economy through increased government spending and tax cuts, while monetary policies aimed to lower interest rates and increase the money supply to encourage borrowing, investment, and consumption.
Increasing the money supply played a crucial role in the monetary policy response. By increasing the money supply, the Fed aimed to address the lack of liquidity in financial markets, encourage lending, and support economic activity. This measure aimed to alleviate credit supply constraints and restore confidence in the financial system, allowing businesses and individuals to access credit, expand their activities, and stimulate economic growth.
5. Evaluation of Policy Success:
The success of the implemented policies can be evaluated by considering several key indicators. The initial immediate response of the fiscal and monetary policies, such as the ARRA and Fed's interest rate cuts, helped stabilize the economy and restore market confidence during the Great Recession. While the recovery was slow and faced numerous challenges, these measures played a pivotal role in preventing a more prolonged and severe crisis.
However, the success of the policies can also be examined based on the long-term impact and their ability to achieve their desired goals. The fiscal stimulus provided by the ARRA helped prevent a deeper recession and assisted in creating jobs and supporting economic growth. Similarly, the monetary policy measures undertaken by the Fed, including interest rate reductions and open market operations, helped restore liquidity to the financial system and encourage borrowing and investment. Ultimately, these policies contributed to economic recovery.
Conclusion:
In response to the challenges posed by the Great Recession, the U.S. government employed a combination of fiscal and monetary policies to combat unemployment, negative economic growth, and deflation. By implementing these policies, the government aimed to stimulate aggregate demand, increase the money supply, and stabilize the financial system. Although the policies faced long-term challenges, such as slow recovery, they were crucial in preventing a more severe crisis and ultimately played a significant role in initiating and facilitating economic recovery.
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