Express Economical Policy Before and after Economic Crash 2008 (Essay Sample)

Express Economical Policy Before and after Economic Crash 2008
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After the great recession that occurred in late 2007 until mid-2009, most governments in the world have employed a number of actions to heal their hurt economies. Recession refers to an economic situation that creates reduced or slow growth in the economies (gross domestic product) GDP. Recessions create reduced aggregate demand and unemployment. The consequence of the great resection was felt around the globe and the developing countries being the worst hit by this situation. The influence of the recession is still momentous on the world economy. Even though the recession ended, the global market has still not achieved normalcy in its operations. This can be noted by the efforts by the different world economies into promoting and stabilizing their economic status. Different policies and plans are implemented by governments in an attempt to correct the situation whose success and failure, remain disputed. Among the correction policies implemented to rectify the situations include, the economic stimulus plans and the austerity policy. The implementation of the stimulus program in the United States in February 2009 by the congress was a step in the country's bid to recover from the great recession (Mallard, 2011).
Economic stimulus policies involve the roles that are played by the government in using financial stimulus for improving growth and slowing movement of the economy. It includes the monetary together with the fiscal policies. The monetary policy involves control of the interest rates in lending and other thresholds. While the fiscal policy encompasses the government attempt to improve money in circulation by investing in some projects and controlling taxation. Austerity involves the government reducing their spending so that they can reduce their budget deficits. It involves the government cutting down some of the privileges and payments that would otherwise be given in the economy in the bid to reduce budget deficits (Vanita, 2010).
Although different policies have been implemented, their success is still a question of fact. The slow and poor growth in the global GDP pause a question on whether the global economy is improving. The dispute between the Keynesian theory and the Orthodoxy theory stand out to be the significant questions to the economic repair. The fiscal and monetary policies borrow from the Keynesian theory that assumes that increased spending in the economy affects the output of the economy and the rate of inflation. Based on this, develops the participation of the government in increasing aggregate demand with an aim of improving the economy. The orthodoxy theory suggests the opposite, which is advocating for less interference of the government in the economy. Addressing the unemployment question, the orthodoxy theory states that on normal occasions a free market economy achieves full employment since employers make enough income that gradually accommodate more employees. Keynes’s theory suggests that the single most paths to take in achieving full employment, is by the government implementing projects that promote investment thus creating employment. Governments that are unwilling to influence directly factors of aggregate spending in order to reduce levels of unemployment may not succeed in the process of achieving economic growth. According to Keynes, the ability of an economy to grow depends on the ability to spend, and individuals cannot spend an amount that they lack or do not have thus need jobs. Creation of employment and employing more people grows the economy (Sardoni, 2011).
The multiplier effect relates to the economy’s expansion of the supply of cash in the market by the ability of lending of financial institutions. This effect relates to the amount of cash in circulation. This concept is important to note for any economies growth. Commercial banks are key players in this factor where they keep a stated reserve requirement. They further keep a percentage of every deposit or savings made to them, and lending the rest to other clients whose deposits are also retained based on the reserve requirements. Gradually the money in circulation grows to build a bigger reserve. High rates of reserve mean limited supply of money in the market while lower reserve requirements mean an increased supply of money in the market. The multiplier effect is applicable in the creation of investment opportunities. The increase or decrease of employment in an economy directly relates to the multiplier effect, since it is responsible in the creation of investments. The study of the multiplier effect in a given economy helps in policy formulation, and a better evaluation and analyzing of the cycle of trade in an economy. It promotes the aspect of public investment that helps address problems of unemployment that creates equilibrium between investment and savings.
The Keynesian theory has proved in improving levels of employment and improving the aggregate demand. The theory has had its flaws too. After the Second World War, the employment of the Keynesian theory in addressing g the downturn and high unemployment proved a success in the United States. A few years later the US economy was faced by massive recession and inflation rates. This is a clear show that the Keynesian theory is an ideal tool for controlling aggregate demand and cannot address the recession problems. The inability to address the supply side of the equation proves a limitation of the theory. The Keynesian theory only applies to a population that has not reached full employment. Economies experiencing full employment and still apply the Keynesian theory will experience a recession (Sardoni, 2011).
Recession periods are characterized by reduced or slow growth in the (gross domestic product) GDP. Economies that experience recession, and still apply austerity in an attempt to control government debts will experience problems. Austerity involves the reduction of government spending with the aim of reducing its debt or budget deficit. Reduced government spending reduces the aggregate demand of an economy. This creates a population with little purchasing power, reduced supply of money in the economy and unemployment. The reduction in government spending only worsens the impact of recession than heal the economy. This leads to a deeper economic plunge due to the high unemployment rates and slow GDP growth. Recession periods need government intervention by applying the monetary and fiscal policies in rectifying the existing problem. Maynard Keynes’s solution to this problem would be to first increase the government spending and employ other relevant policies that promote the creation of employment. ...