Demand-Side Policies and the Great Recession of 2008 and Beyond (Essay Sample)

Demand-Side Policies and the Great Recession of 2008 and Beyond
Name:
Institution:
Demand-Side Policies and the Great Recession of 2008 and Beyond
Introduction
Economic Meaning of Recession
Recession is defined as a period characterized by falling economic activities that are spread across the economy. These periods normally last for a few months. The effects of the slowed economy are felt in the real gross domestic product (real GDP), employment, real income, industrial production and also in the wholesale and retail sales. The above factors are the indicators that are observed to determine whether there is a recession in the economy (Krugman, 2009).
Fiscal policies
Fiscal policy regards the application of taxation and expenditure of the government to influence or impact the economy. This is effective when the government makes a decision on the services and goods it wants to purchase, its transfer payments that it distributes and the taxes that it collects. The basic economic impact of the government changes in the budget is felt by a certain group. For instance, in case of a cut in the amount of tax paid by some families who have children, it increases their amount of disposable income (Buti, 2003).
The fiscal policies majorly concentrates on the impacts of the government budget changes in the general economy. The fiscal policies are said to be contractionary or tight when the amount of revenue is more than that used in the government spending. That is, when there is a surplus in the government budget (Buti, 2003). The fiscal policies are as well said to be expansionary or loose when the amount of government spending is higher than that of revenue. In this case, the budget is said to be in deficit. In this case, the focus is on the deficit change and not in the level of change.
Monetary policies
Monetary policy constitutes influencing or affecting the availability and the credit cost and money to promote or encourage a healthy economy. The Fed constitutes the monetary policy authority of the U.S (United States). The Fed has no authority, directly, to control inflation, employment, or output or set the long-term rates of interest. However, it affects these fundamental variables of the economy indirectly principally via its control over the funds rate of the Fed. The most frequently applied monetary policy tool by the Fed is the open market operations (Correia, Nicolini, & Teles, 2003).
The aggregate demand level is also affected by the fiscal policy. The government meets most of its expenses by issuing bonds when it runs short of cash. This means that the government competes for money with the private borrowers for the monies that are loaned by individual private borrowers. This will crowd out private investments. This works to reduce the fraction of the amount of output that composes the private investment (Buti, 2003).
The use of fiscal and monetary policy in the restoration of economic growth and reducing the unemployment level
A free market economy was long supposed that it would be capable of functioning well without any interference from the government. It is still worth noting that the free market economy does not establish the demand for goods and services automatically. Before the year 2008 recession, there was a lot of believe in the quantity theory regarding money. The Federal Reserve was thought to be in a position of preventing any form of future busts and booms. The economic slowdown of the year 2008 shattered such hopes. This led to an augmented stress in the fiscal policy (Grusky, Western, & Wimer, 2011).
During the year 2008 economic meltdown, the Federal government undertook proactive actions in order to steer the economy. The federal government used its powers and increased the aggregate demand by increasing its amount of spending. This created an easy money form of environment that stimulated the economy through more creation of jobs and increased prosperity among the American people. Additionally, the Fed (Federal Reserve) board applied very powerful tools to restore the prosperity of the American economy. The buying/purchasing and selling/offering of the United States government bonds, that is, the open market operation, which had the effect of increasing the supply of money within the economy. In this case, the federal government raised the price of bonds and decreased the interest rate. This encouraged more Americans to sell off their bonds at a higher price to at least benefit from the increased price and not to suffer from continuing to hold onto these bonds that would yield less interest (United States, Congress. Joint Economic Committee, 2008). Consequently, the aggregate effect was an increased amount of money in circulation. The federal government influenced the restoration of the economy by the use of the reserve requirements. This was effected by reducing the amount of the reserve requirements. This meant that more cash was then available to be lent out to the American people. The final...