Demand-Side Policies and the Great Recession of 2008

Demand-side Policies and the Great Recession of 2008
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Demand-side Policies and the Great Recession of 2008
The Great Recession of 2008 was a period of global financial and economic meltdown that led to financial panic and the collapse of many financial corporations and industries across the globe. The world experienced a high rate of unemployment and low economic growth rate during this period. Nations applied both fiscal and monetary policies that aimed at stimulating the economy of the individual countries and the global economy at large. This paper explains the effects of economic recession and explains the fiscal and monetary policies that are used to stimulate the economy during the recession.
Recession refers to a decline in economic activities which is characterized by an increase in unemployment, decrease in industrial production and a drop in the prices of shares, bonds and other items traded in the stock market. Recession is caused by factors such as high rate of interest, inflation, a decline in real wage and low consumer confidence in the economy. Recession leads to a recessionary gap, meaning that the aggregate demand is reduced to a level lower than it should be at the full employment economic situation. Both fiscal and monetary policies are used to correct the impact of recession in the economy. The decision on which method is applicable depends on whether the economy requires outside influence, or can self-regulate itself (Stehn & Leigh, 2009). However, the two methods are often used concurrently.
Fiscal policy refers to the use of government actions such as government spending and taxation to affect the economy. This method is used in cases where the economy cannot self-correct itself and thus requires external influence to bring the prices, economic growth, employment and other factors to the desired level. The fiscal policies aim at affecting the aggregate economic demand, which in turn affects the other economic factors. The aggregate demand comprises of the individual consumption expenditure of the individual investment expenditures, government expenditure and net income from the country’s exports. There exist two types of fiscal policies, that is, expansionary and contractionary policies. During a recession, expansionary actions are applied to increase the aggregate economic demand through an increase in government spending and a reduction in taxation. Increased government spending increases the demand for goods hence restoring the economy back to the full employment situation (Langdana, 2009). Low taxation also has the effect of influencing the demand indirectly since the public is allowed to retain more money for investment and consumption purposes.
Monetary policy refers to the use of monetary authority to control the money supply and the interest rates and as a result, affect the economy. The goals of monetary p...