¶ … Macroeconomic Situation in the U.S.: Corrective Fiscal and Monetary Policy
December 2007 marked the onset of the Great recession, which ended in mid-2009 but left the U.S. economy struggling through the damage wrought by its severity. Federal policy has gone a long way in the prevention of an occurrence of another recession, but growth remains too sluggish and inadequate for the full-health restoration of the economy. Vigorous and sustained fiscal and monetary support is needed if the economy is to recover and achieve the pre-depression employment level.
Save for the temporary hiring of census officials, the overall economy recorded a drastic fall in employment levels during the last half of 2009. In December 2012, the unemployment rate was reported at 8.1% - approximately 3.5 percentage points above the average rate in 2007, at the end of which the Great Recession struck (Bureau of Labor Statistics, 2014). This rate further exceeds the peak rates recorded in the wake of previous recessions experienced at the beginning of the 20th and the 21st centuries (BLS, 2014). The tabular representation below shows the unemployment rates between 2007 and 2012.
Unemployment Rates between 2007 and 2012
Jan
March
May
July
September
November
Annual
2007
4.6
4.4
4.4
4.7
4.7
4.7
4.6
2008
5.0
5.1
5.4
5.8
6.1
6.8
5.7
2009
7.8
8.7
9.4
9.5
9.8
9.9
9.1
2010
9.7
9.9
9.6
9.5
9.5
9.8
9.7
2011
9.1
9.0
9.0
9.0
9.0
8.6
9.0
2012
8.2
8.2
8.2
8.2
7.8
7.8
8.1
(Source: Bureau of Labor Statistics, 2014).
Prior to...
The depression, however, brought in its wake, rampant price instability, with the average annual rate of inflation falling to an all-time low of -0.4% in 2009, from 3.8% in 2008, as depicted in the tabular representation below.
Annual Inflation Rates from 2003 to 2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2.3%
2.7%
3.4%
3.2%
2.8%
3.8%
-0.4%
1.6%
3.2%
2.1%
(Source: U.S. Inflation, 2013)
The declining unemployment rates and the price stability between 2011 and 2011 are positive indicators of the U.S. policy makers' commitment to restoring the economy to the pre-depression economic levels, and steering it to full employment.
The Great Recession inflicted significant damage, especially upon the middle and low-income earning Americans. At the core of this is a fall in the aggregate demand, which is a problem that is imminently solvable through accommodative federal fiscal and monetary policy (Greenlaw, Hamilton, Hooper & Mishkin, 2013).
Fiscal policy is the use of taxes and government spending to achieve stabilization in the economy (Greenlaw, Hamilton, Hooper & Mishkin 2013). During recession, Congress should stimulate demand by i) increasing government spending, and ii) reducing taxes (inflationary fiscal policy). The former 'primes the pump' in the economy, whereas a tax reduction ensures that people have more income at their disposal, with which they can make more purchases (Council for Economic Education, 2014).
Both methods stimulate aggregate demand and induce firms to increase their production, hire more workers and increase the incomes of these workers so as to increase their purchasing ability (Council for Economic Education, 2014). Increased government spending would be more effective than a tax-cut because the former "has a direct effect on aggregate demand" (Council for Economic Education, 2013). There is no guarantee that consumers would spend…
