Fiscal and Monetary Policies

Fiscaland Monetary Policies

The2008-09 recession which hit the United States of America and theglobe led to substantial loss of output (GDP), escalated unemploymentand caused a deflationary panic in many economies. The role of USgovernment in the economy goes past its activities as a regulator ofparticular industries. It also controls the tempo of economicactivities, trying to stabilize prices, curb inflation and maintain ahigh level of employment. Government has two fundamental tools ofattaining these objectives: monetary policy through managing thecirculation (supply) of money and fiscal policy through which itestablishes the suitable level of taxation and spending (Tcherneva,2011).

FiscalPolicy

Lendingto financial institutions

In2008-09 as the economic woes become more and more severe the FederalReserve provided lines of credit to banks and other financialinstitutions. This cash injection was meant to make funds availableto consumers (loans) and subsequently induce consumer buying, the cogthat drives the economic wheel. In addition the central bank ofAmerica loaned funds to large financial firms such as J.P. Morganwhich were on the verge of collapse (Tcherneva, 2011). This providedthe required liquidity to banks and markets.

MonetaryPolicy

In2010 the US Government significantly increased its expenditure inorder to stimulate the economy. Most of the fiscal agenda wereconducted by the Federal Reserve and encompassed purchase of largenumber of nonperforming financial assets from the books of accountsof ailing institutions (Tcherneva, 201). In 2008 Fed lowered thelevel of interest rate , implementing a zero-interest rates. In thesame year, Congress had approved $700 billion to enable the FederalReserve to purchase the asset backed securities (Davis,2012).This served to infuse money into strategic firms and as consequentstabilize the balance sheet of financial institutions. This was tomake sure that credit was flowing in the economy for investmentfinancing.

Thesemeasures were designed to stabilize inflation and economic activityby stimulating and encouraging aggregate spending. An increase inaggregate spending has a direct impact on the economy throughstimulating demand for goods and services. The indirect impact isinducing private consumption as firms and households acquire morepurchasing power.

References

Davis,M.(2012). HowThe Federal Reserve Fights Recession.Retrieved from: http://www.financial-edge.com//0912/how-the-federal-reserve-fights-recession.aspx

Tcherneva,R.P. (2011). FiscalPolicy Effectiveness: Lessons from the Great Recession.Levy Economics Institute of Band College. Retrieved on 20, Octomberfrom http://www.levyinstitute.org/pubs/wp_649.pdf