Monetary Policy and Government Research Paper

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Demand-Side Policies and the Great Recession of 2008

A recession can be defined as an overall downward spiral in a nation's economy. In particular, the outcome of recession is high inflation, high level of unemployment slowing down its gross domestic product (GDP) (Study, 2016). In this period there is an economic weakening and is usually accompanied and further complicated by decrease in the stock market, an upturn in unemployment and also a deterioration in the housing market. Some of the factors that cause recessions include high interest rates, increased inflation, decreased consumer confidence, and decreased real wages (Mankiw, 2014).

Fiscal Policies

In delineation, fiscal policies refer to the use of government expenditure and taxation to regulate the aggregate level of economic activity. It can be argued that by increasing investment or government expenditure, for instance, an initial stimulus to expenditure, through the multiplier-accelerator interaction results in an even greater increase in national income (Mankiw, 2014). When the government makes the decision with regard to the goods and services it buys, the transfer payments it disseminates or the taxes it collects, it takes part in the fiscal policy. Fiscal policy is deemed to be contractionary when the revenue is greater than the expenditure, i.e.; the government budget is in excess. On the other hand, fiscal policy is deemed to be expansionary when the expenditure is greater than the revenue, that is, the government budget is in deficit (Weil, 2008).

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Monetary Policies

Monetary policy can be defined as one of the public intervention measures aimed at influencing the level and pattern of economic activity so as to achieve desired goals. Monetary policy covers all actions by the central bank and the government which influence the quantity, cost and availability of money and credit in the economy. Specifically, monetary policy works on two principles -- 1) Economic variables, meaning, the aggregate supply of money in circulation and 2) the Level of interest rates (Mankiw, 2014). First of all, the Federal Reserve oversees and institutes codes of practice and guidelines for a range of commercial banks, together with capital reserve requirements. Secondly, the Fed institutes the discount rate, which is the rate at which banks are able to borrow from the Federal Reserve. Third, it takes part in open market operations (OMO), i.e.; the purchasing and selling of U.S. Treasury Securities and other assets, with the purpose of controlling the federal funds rate, indirectly impacting the money supply in the economy of the United States (Genetski, 2014).

Benefits of Fiscal and Monetary Policies in Restoring Economic Growth and Decreasing Unemployment

Monetary policies and fiscal policies are implemented by the Fed in order….....

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