Essay Sample on Macroeconomic Policies During Recessions

Introduction

Economic Recession refers to a financial situation where the output of the country is low reflecting a negative Gross Domestic Product. In such a scenario, the government can use fiscal or monetary policies to restore the economy to normalcy. Fiscal policies involve the government while monetary policies involve the Central Bank. Monetary measures may be taken to either increase or decrease money supply in the economy. Fiscal policies are considered to encourage expenditures by the government as well as decrease tax rates. Both procedures can be used to attain economic equilibrium, and reduce unemployment.

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Fiscal policies include proper utilization of government resources, the creation of employment, improving standards of living, attaining price stability through balancing between aggregate demand and aggregate supply. It also involves encouraging investments, in the public sector which in turn stimulates investment in the private sector. Equal distribution of resources and optimization of these resources is a crucial aspect of fiscal policies that will help in achieving economic stability. In case of recession, the government should increase their expenditures. Increase in spending will increase the amount of liquid money in supply, create employment opportunities and stipulate a growing economy. If the government decreases the rate of taxes levied on incomes and payrolls, it will attract more spending from the citizens, and in turn, increase aggregate demand.

Monetary policies involve the Central Bank controlling the amount of money in circulation. It may either increase or decrease the supply of money depending on the economic factors whether it is a recession or inflation respectively. In case of recession the government opts to buy a government bond. The Central Bank lowers the interest rates on loans which encourages borrowing and spending. It also involves reducing reserve rations. The result of this is an increased money supply in the economy which allows for investments. If both policies are adopted during the recession, the spending ratio of the government increases, the reduced tax rates, and interest rates stimulate investments, and the economy attains a state of equilibrium through equal aggregate demand and supply.

The figure below explains an illustration of the recession in the United States between 2008 and 2009.

From the diagram above it indicates that during recession occurred when the intersection of aggregate demand and aggregate supply occurs below real Gross Product. At E0 Recession occurs due to low output leading to loss of jobs. Application of fiscal or monetary policy means that the aggregate demand shifts from ADo to AD1, which explains that more jobs have been created and there is more spending. It also implies that the taxes levied on the income of citizens increasing their purchasing power. The equilibrium shifts from E0 to E1, price increases from P0 to P1 while the real GDP shifts from Y0 to Y1.

During the recession in the United States that began in the last quarter of 2007 to 2009, the rate of unemployment increased to 8.5%. Gross Domestic Product decreased by 0.5% while the purchasing power of consumers dropped by 6.4%. The value of savings and wealth had declined to shun people away from spending. Action needed to be taken promptly, and the then president Barrack Obama with the support of the Congress party adopted both expansionary fiscal policies and tax cuts that were argued upon by Democrats and Republicans respectively.

The adoption of these measures meant an improved economy in which expenditure increased from 19.6% of GDP in 2007 to 24.4% in 2009. The tax revenues decreased from 18.5% of GDP in 2007 to 14.8% in 2009. More jobs were created, and investors came in from both the public and private sector and a growing economy eventually. In as much as it took some time to restore the economy to equilibrium, the right measures had been adopted and provided a lasting solution to America's trade and economic issue.

Apart from the recession, these policies can as well address inflation and depression challenges ion the economy. The Gross Domestic Production in a country is dependent on government expenditure as well as the purchasing power of the citizens. Macroeconomic policies such as monetary and fiscal and monetary policies help in solving economic challenges. For instance, if budgetary policies such as lowering tax rates on incomes of citizens increase their purchasing power of local products which reflects an increase in Gross Domestic Product. Investors are attracted to invest their resources in the country both from the public and private sector which means that more jobs will be created. Monetary policies that involve control of liquid money supply help in increasing government expenditures as well. It also marks a reduced interest rate on loans thus encouraging borrowing from financial institutions. Inflation results from a hike of prices of consumables. Application of monetary and fiscal policies aids in arriving at an equilibrium point for both aggregate demand and aggregate supply. The goods in the market will attract an affordable price for consumers to increase sales and maintain customer loyalty.

Conclusion

It is common for any country to face economic challenges like inflation, recession, depression, unemployment and a drop in the Gross Domestic products. It is only wise to employ macroeconomic models in addressing these issues and bring back the economy to equilibrium. The policies adopted are fiscal policies that involve an increase in spending by the government, individuals as well as cuts on income taxes. Monetary policies affect control of money supply. In applying these policies, it is recommendable to segment the economy into sectors especially for large countries like The United States since the plans work well for smaller regions. Governments should set aside funds during the annual budget that will help reinstate the economic state if such problems occur. It is also essential to monitor government revenues and monopolistic power in the market to prevent financial problems from happening. The economy of a country is a reflection of the living standards of the people, the country's wealth and development. It also describes strong governance from its leaders.

References

Akerlof, G. A. (2014). What Have We Learned?: Macroeconomic Policy after the Crisis.

Canterbery, E. R., & World Scientific (Firm). (2011). The global great recession. Singapore: World Scientific Pub. Co.

In Alesina, A., & In Giavazzi, F. (2013). Fiscal policy after the financial crisis.In Alvi, E. (2017). Confronting policy problems of the Great Recession: Lessons to macroeconomic policy.

Keynes, J. M. (2018). The general theory of employment, interest, and money.