Use of Monetary Policy and Fiscal Policy During The Great Recession

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How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility . Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by the Central Bank and influences money supply . Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. When lowering taxes the people have more to spend then the government decreases spending and the economy slows down therefore the economy stabilizes. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products. Therefore, lowering tax rates increases GDP. The steady growth of inflation in 2007 and 2008 suggest that the Federal Reserve applied discretionary powers to avoid tightening. Tightening is inflation growing too fast. In 2009 the feds needed to be concerned about the deflation because the average inflation rate dropped to -.4%. Inflation tends to follow movements and they are closely related to the business cyc... ... middle of paper ... ... Okun, A. 1962. “Potential Output: Its Measurement and Significance.” in Proceedings of the Business and Economic Statistics Section, American Statistical Society. Washington, DC: American Statistical Association. Phelps, E. 1994. “The Origins and Further Development of the Natural Rate of Unemployment,” in R. Cross (ed.), The Natural Rate Twenty-Five Years On. Cambridge, UK: Cambridge University Press. Romer, C. and J. Bernstein. 2009, “The Job Impact of the American Recovery and Reinvestment Plan.” January 10. Available at: http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf Skidelsky, R. 2001. John Maynard Keynes, Volume Three: Fighting for Britain 1937–1946. London: Macmillan. Tcherneva, P. 2011. “Permanent on-the-spot job creation—the missing Keynes Plan for full employment and economic transformation.” Review of Social Economics, forthcoming.

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