Meaning of Recession

8/9/2019 Meaning of Recession

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Running head: DEFICIT SPENDING1

The Choices of the United States

Edna Fenollal

American Public University System

27 July 20 !

EC"# 02

Prof$ %each


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The Choices of the United States

The United States &overnment is res'onsible for 'rotectin& its 'eo'le$ Unfortunately(

sometimes that 'rotection is from economic )oes$ A lar&e number of fiscal and monetary

'olicies can hel' to alleviate 'roblems resultin& from recessive economic trends$ *n the case of

the late housin& bubble( the resultin& financial crisis( and +reat ,ecession( the United States

used a ran&e of different 'olicies to brin& the country bac- to healthy &ro)th$

Fiscal Policy and Monetary Policy

Fiscal 'olicy is a''lication of &overnment s'endin& and savin&s in relation to the

economy$ "ften driven by needs ori&inatin& from an e.'andin& or contractin& economy( fiscal

'olicy focuses on 'resentin& 'ossible &overnment solutions$ For instance( a contractin&

economy can be alleviated )ith increased &overnment s'endin& and decreased ta.ation( both

solutions )hich hel' return solvency to individuals )ho are sufferin& from the contraction$

/i-e)ise( an inflationary &a' in the economy may need a contractionary fiscal 'olicy to rein in

the 'rice level increases$ This could ta-e the form of decreased s'endin& and increased ta.ation

Schmidt( 20 21$

onetary 'olicy is the a''lication of financial decisions at a macroeconomical level from

the stand'oint of a central ban-in& system$ The American Fed uses three main monetary 'olicies

in order to hel' recover from economic )oes$ These include settin& the reserve re3uirements of

other ban-s for their loans( usin& a discount )indo) to 'rovide ban-s a means of accessin& loans

for themselves( and 'erformin& o'en4mar-et o'erations to includes the buyin& and sellin& of

&overnment bonds Schmidt( 20 21$

The Great Recession


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DEFICIT SPENDING 4

related to the federal deficit$ 9o)ever( unem'loyment insurance sa) len&ths e.tended at the

state levels( financed by the federal leve ,omer ,omer( 20 81l$

ost of the recent 'olicies have been 'urely contractionary$ These have served t)o

'ur'oses( the first of )hich is 'redictive$ The economy )as clearly recoverin& from the

recession( but if the 'olicies remained unchan&ed bac- to 're4recession levels( it could lead to

lar&e amounts of inflation$ %y cuttin& bac- before this ha''ens( the &overnment )ould ho'e to

'revent the different forms of la& that are normally involved )ith fiscal 'olicies ,omer

,omer( 20 81$

A second reason is li-ely due to one of 'erce'tion$ a-in& the chan&e sends a si&nal of

confidence to the 'rivate sector$ *f the &overnment is confident that the recession is over( then

the 'eo'le )ill also be confident in this shift$ A confident 'o'ulace is more li-ely to s'end and

&et the &ears of the economy movin& for)ard$ Perce'tion of a &ood economy can lead to a &ood

economy$ ost of these contractions involve undoin& 'revious ta. brea-s( but also ta. increases

related to fundin& the Affordable Care Act ,ittenber& Tre&arthan( 20 !1$

The monetary 'olicy used in the United States may have contributed the &reatest to)ards

avertin& another de'ression$ Probably the most noticeable( and a difficult one to label as either

fiscal or monetary 'olicy( is the Troubled Asset ,elief Pro&ram TA,P1$ eant initially to be a

means of dealin& )ith the alle&edly to.ic assets of ban-s( TA,P 'ushed ca'ital into the ban-s

)hen they did not have it %aumeister %enati( 20 01$ *t )as essentially an absolutely free

discount rate( a loan from the &overnment at no interest rate$ "ver ::; of the entire e.'enditure

has been re'aid accordin& to the U$S$


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DEFICIT SPENDING 5

5hile fiscal and monetary 'olicy may seem li-e flimsy solutions( no entity s'ends as

much in the United States as the federal &overnment$ %ein& able to direct funds in such a lar&e

manner and to control the relative incomes of every citi=en can have a hu&e im'act on recession

conse3uences$ 5hile the recovery 'eriod may have seemed lon& to those )ho lived )ithin it(

the +reat ,ecession may have been far )orse )ithout the 'olicies enacted at the national level$

The entire recovery may not yet be com'lete( but evidence of &ro)th is 3uite clear( and )ill

ho'efully be unaffected by a fresh economic disaster any time soon$


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,eferences

%aumeister( C$ %enati( /$ 20 01$ >Unconventional onetary Policy and the +reat

,ecession$? ,etrieved from

htt's@ )))$ecb$euro'a$eu events conferences shared 'df )&em Session B%aumeisterBP

a'er$'df DDbf!ace7ff7:a0 e02aD b6fe c8f86

,ittenber&( /$ Tre&arthan( T$ 20 !1$ Principles of Macroeconomics $ Saylor Foundation$

,etrieved from htt'@ )))$saylor$or& site te.tboo-s Princi'les;20of

;20 acroeconomics$'df

,omer( C$ ,omer( Fiscal Policy in the +reat ,ecession$? University of

California %er-eley$ ,etrieved from

htt'@ eml$ber-eley$edu )ebfac cromer e 8!Bs' 8 /ecture;20 D;20Slides

;20/on&$'df

Schmidt( $ 20 21$ >A /oo- At Fiscal And onetary Policy$? Investopedia $ ,etrieved from

htt'@ )))$investo'edia$com articles economics 2 fiscal4or4monetary4'olicy$as'

U$S$

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Meaning of Recession