Essay On Fiscal Policy

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Fiscal Policy: Fiscal policy, the responsibility of government and congress, is enacted through changes in government spending and taxes. The question about how effectively fiscal policy promoted recovery during the great depression has been a point of discussion among economists for several decades. Hoover’s Fiscal and Trade Policy: The great depression began with collapse of the stock market in 1929. Herbert Hoover served as the President of United States from 1929-1933. The general belief before the great depression was that the peacetime budget should always be in surplus, so that the federal government can maintain its outstanding debt at a minimum. Before 1930, the only time the federal budget was in significant deficit was the war years. Hoover’s fiscal policy was centered on making sure that the government budget remained in surplus and he was a staunch advocate of balanced budget. Hoover increased government spending considerably by expanding existing programs like doubling federal highway spending and increasing the spending of Army Corps of Engineers by over 40 percent. Hoover dam also contributed a significant amount to public works spending. Congress nearly doubled real federal spending and ramped up federal lending through the Reconstruction Finance Corporation. Nominal federal expenditures were increased by greater than 50 percent from 3.1 billion in fiscal year 1929 to 4.6 billion in fiscal year 1933 (Figure 1) . Increased government spending resulted in falling tax revenues which resulted in federal budget running deficits for the first time since World War 1. This prompted Hoover to bring about a tax increase through the Revenue Act of 6 June 1932. It raised individual tax rates with the top rate increasi... ... middle of paper ... ...irect administrative control over reserve requirements of member banks. Member banks were required to hold a share of deposits in reserve at the Federal Reserve. Real GDP increased rapidly and unemployment declined as shown in figures 5 and 6. However, unemployment was still around 15 percent. Figure 5: Change in Real GDP Figure 6: Change in unemployment rate5 Banks were holding large reserves above and beyond the required reserve requirement which caused the fed to start worrying about inflation as money supply would increase dramatically once banks start lending out their reserves and could halt the economic recovery. This prompted the fed to double their reserve requirements; however banks did not trust the fed as a lender and further cushioned their reserves resulting in a spike in unemployment to 19 percent (figure 6) and a decline in real GDP (figure 5).

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