Essay Sample on Demand-Side Policies and the Great Recession of 2008

Introduction

A recession, in general, is a decline in economic, business or any other activity affecting a country and it associated with high inflation, high unemployment and low production on domestic products. Between December 2007 and June 2009, the United States experienced a severe recession in the postwar period. The great recession was greater than any recent recession, and it took nearly four years for the economy to stabilize the GBP level (Barr & Turner, 2013). The great recession reduced employment for many United States workers and it was concentrated among men, workers with lower educational level and young workers and brought about the suffering of many workers in the aftermath of the recession.

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The economic meaning of recession is a general decline in gross domestic product (GDP) continuously for some time. GDP is the market value of goods and services manufactured in a country for sometimes, and due to the low supply, the country suffers from various setbacks that include a drop in the stock market exchange, unemployment issues and a decrease in the housing market which in turns causes inflation (Engen & Skinner, 1992). Most times the federal leaders or the President are often blamed for the inflation period because consumers feel that they can change the situation.

Fiscal policy is the strategy in which the government uses to adjust the spending level and tax rate to observe and influence the economy of the nation, and this means that the government can affect economic productivity levels by increasing or decreasing tax levels and public spending (Engen & Skinner, 1992). Fiscal policy is used by the government to either stimulate the sluggish economy or to slow down the economy that grows out of control, and this method played an important role in the economic recovery during the great recession.

There are two types of fiscal policy namely expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy is where the government increases their spending and lowers taxes, this means that the government will increase the aggregate demand curve and at the same time decreases the taxes and by doing so the consumers will have more money in their disposal for their general use, and therefore investment becomes easier (Friedman, 1995). The results are mainly to slow down the recessionary gap and to help the growth of the economy. Contractionary fiscal policy is applied when the economic growth is getting out of control, and it is customarily used to maintain the economy to a sustainable level. These are where the government reduces the government spending and increases the tax, by doing so the aggregate demand curve will decrease, and the consumers will have less money to consume and invest therefore the economy will be sustainable.

Monetary policy is a process where the central bank controls and regulates the money supply or the cost of short term borrowing to curb inflation or interest rate to ensure the currency is stable (Engen & Skinner, 1992). It is basically to control the demand and supply of money to the consumers, and it also contributes to economic growth and stability which reduces unemployment and maintains a foreseeable exchange rate with other countries. The central bank has three main tools that it uses to ensure that the economic growth is healthy and they are mainly open market operations, the discount rate, and the reserve requirement. Open market operations are when the central bank often buys or sells securities such as bonds, stock or shares, which are sold to the country's private banks. This adds more money to the banks' reserves and leads to more money lending. When the central bank decides to sell its securities, it puts them on the banks' balance sheet and reduces the cash in the bank; therefore, it reduces its lending. If the central bank wants expansionary monetary policy, it buys the securities, and by doing so, it lowers the interest rate and increases aggregate demand to boost the economy. The same applies when the bank wants to sell the securities, it executes contractionary monetary fund whereby it slows the economy growth by increasing interest rates to make lending more expensive.

The discount rate is another tool used by the central bank to charge its members to borrow at the discount window. It only uses this method if it can't borrow from other banks due to the stigma that it may be attached. In most cases, the financial community assumes that any bank that uses discount window is desperate or facing economic challenges (Friedman, 1995). Reserve requirement is the amount of fund the bank must have at hand on each night, the percentage of the banks' deposit per day. A low reserve requirement allows the bank to lend more of their deposits while a high reserve requirement gives the bank less money to borrow at a given point.

Conclusion

Both fiscal and monetary policy played significant roles in ensuring the stability of the nation during the great recession, and it helped in maintaining positive economic growth, lowering inflation and creating employment thus providing the balance of the country is in control. During the great recession, monetary policy contributed best to macroeconomic growth and helped in the reduction of unemployment by increasing the money supply. The banks ensured that the discount rates were minimized which in turn enabled the consumer to have money circulation and this helped them to invest and increased employment.

References

Barr, A., & Turner, S. E. (2013). Expanding enrollments and contracting state budgets: The effect of the Great Recession on higher education. The ANNALS of the American Academy of Political and Social Science, 650(1), 168-193.

Engen, E. M., & Skinner, J. (1992). Fiscal policy and economic growth (No. w4223). National Bureau of Economic Research.

Friedman, M. (1995). The role of monetary policy. In Essential Readings in Economics (pp. 215-231). Palgrave, London.