Demand-Side Policies and the Great Recession

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Demand-Side Policies and the Great Recession

Abstract

The demand-side policies are adopted during an economic recession to bolster the aggregate demand. These include both fiscal and monetary stimuli to the aggregate demand. The fiscal stimulus included increasing government spending and cutting down taxes. The latter also included the provisions of rebates and loss carry forwarders for businesses. The monetary stimulus was also comprehensive and resulted in reductions of federal fund rates to about zero. In addition, the long-term rates were also adjusted as well as massive asset increases were undertaken by the central bank. However, it was found that these stimulus measures do not improve the prevailing unemployment rates which depend on actual output growth rather than an artificial stimulus.

Introduction

A recession is defined as a state in the economic business cycle when the activity in the economy troughs. Accordingly, there is a sharp decline in the gross domestic product (GDP) of the country. In addition, the recession is also accompanied by other conditions such as deflationary pressures in the economy and very high unemployment rates. The same conditions were also present in 2008 in the United States and in other countries as the global recession took hold in the aftermath of the financial crisis 2007-09 (Carvalho, Eusepi, & Grisse, 2012).

Demand-side policy initiatives

Fiscal stimulus

It is said that in the face of an economic recession, the government has to adopt demand-side aggregate demand stimulus strategies. These strategies include both fiscal and monetary policies that provide the stimulus in the economy. The fiscal policies are implemented through tax cuts and through increases in government spending. Accordingly, the US government also reacted to the condition of the recession in 2008 and increased its government spending. This government spending is to be coupled with increases in household consumption and ...