Fiscal Policy Following the Great Recession: Purpose and Problem Statements

The US recession (US) continued from the end of 2007 to the middle of 2009 (US Economic Policy Institute). In response to the economic situation caused by the Great Depression, the US government implemented various fiscal and monetary policies aimed at improving the state of the US economy (Blinder & Zandi, 2010). The long-term impact of the fiscal policy implemented after the Great Depression was the subject of the proposed research project. This paper details the objectives and problems related to the proposed research project.

Fiscal policy is a change in federal government taxes and expenditures aimed at expanding or decreasing the level of aggregate demand. During the economic downturn, the expanding fiscal policy is accompanied by tax cuts and increased government expenditure. Amid the overheated expansion, tightening fiscal policy calls for higher taxes and lower expenditure. According to Mr. Keynes, the economic recession requires expenditure deficit, and expanding budget surplus is necessary for expansion of overheating. 1) Optional fiscal policy. The first way you can do this is by the federal budget process. However, this process takes as long as 12 to 18 months. It is difficult to adjust arbitrary fiscal policy to business cycle. Kennedy's expansion tax cut in 1964 and subsequent Ford's tightening tax increase in 1974 had an impact on the economy, which required relaxation.

This huge budget deficit is the result of a combination of automatic stabilizer and discretionary fiscal policy. The Great Depression means reducing the economic activity of taxation, which led to automatic stabilization for tax cuts. Many economists are even more concerned about the large fiscal deficit during the severe economic recession and just a few years after the economic downturn.

Automatic stabilizer - A plan to automatically expand fiscal policy at the time of economic recession and to reduce fiscal policy at booming - is a form of anti-cyclical fiscal policy. It is an example of an automatic stabilizer that the government spends more on unemployment insurance during the economic recession phase (when the unemployment rate is high). Likewise, since taxes are roughly proportional to wages and profits, the amount of tax collected during the economic boom will be higher than during recession. Therefore, the tax law can also be used as an automatic stabilization means.

When the economy is moving backward, the expanding fiscal policy is orderly. In many cases, such fiscal policies can lead to increased government spending and tax cuts. The depression that leads to the recession means that the total demand (ie GDP) is below the level of full employment. To compensate for this gap, the government usually increases expenditure, which directly increases the aggregate demand curve (because government expenditure creates demand for goods and services). At the same time, the government has the possibility of choosing tax cuts and indirectly influences the aggregate demand curve by allowing consumers to use more money for consumption and investment. This expanding fiscal policy moves the aggregate demand curve to the right, leading to a shrinking economic recession and economic growth.