The Monetary and Fiscal Policy Implemented in the US
Introduction
The Great Recession that hit the United States recently was detrimental as it saw the collapse of markets and prime businesses. This extended to many parts of the world and efforts have been initiated to restore the world’s leading economy. One of the consequences that came with the global recession was low confidence in consumers in regard to markets, a factor that has reflected negatively in businesses (Recession History 6).
To curb this recession, the United States came up with the monetary and fiscal policy that was aimed at stabilizing the ailing economy. The monetary policy was aimed at minimizing fluctuations and at the same time promoting economic growth whereas the fiscal policy was geared at influencing the economy growth using the United States government’s revenue and expenditure (Auerbach 49). This paper looks at the short run and long run effects presented by the implementation of the monetary and fiscal policy in the United States during the Great Recession.
The short run effects presented by the implementation of the monetary and fiscal policy
The monetary and fiscal policy contrast each other and there cannot be one without the other. For the fiscal policy to take off the monetary policy has to be effected first and this was the case during the great recession. One of the short run effects of this implementation was fiscal deficits that were occasioned by the limited monetary aggregates. To counter this, interest rates were stabilized and this resulted in a monetary increase that made it favorable for business people to invest thus stabilizing the business sector.
A budget deficit was also encountered courtesy of the fiscal policy but the monetary policy sustained the situation by issuing government securities that in turn worked towards bridging the financial deficit. The private sector was brought in here whereby it bought the government securities that in turn generated high interest rates in the market. In addition, the fiscal and monetary policy implementation led to the increase in demand for goods and services in the United States (McMillin and Beard 122-135).
This was brought about by an increase in the government’s purchases that contributed to a reduction in taxes and thus creating a conducive environment for business. The fiscal and monetary policy also highly encouraged people to spend since they had more money at their disposal courtesy of the reduced taxes. The people’s consumption thus rose and this worked positively for the aggregate demand. The fiscal and monetary policy in addition affected exchange rates and this attracted foreign revenue thus promoting a balance in trade.
In this regard, the foreigners ended up bidding higher for the dollar and this worked the exchange rate upwards. In return, imported merchandise became cheaper in the US and this encouraged more purchases. On the contrary, exports became more expensive and this encouraged the local markets to spend on the imports. Foreigners thus found a more solid market for their merchandise in the US though this impacted negatively on the economy as external debts soared. Such a twist may however bring about distrust in the United States and lead to a decrease in the exchange rates that do not contribute in fighting the recession (Weil 1-6).
The implementation of the fiscal and monetary policy also played a great role in the short run in that it contributed greatly to stabilizing the United States’ economy. It managed to do so by increasing the output that led to an increase in demand. It also worked towards the restoration of employment opportunities that had been lost following the collapse of industries due to an increased cost of production. The monetary policy played a great role in the country’s budget leading to its surplus, something that helped in balancing it as well as slowing down the economy. This economic boom helped the government collect higher taxes and this helped in fighting the recession (7-8).
The fiscal policy is weaker as compared to the monetary policy and that is why most of its goals are short term as evidenced in the United States’ case. The fiscal policy was therefore unable to sustain the demand it had generated in the initial stages since output is directly influenced by supply. On the other hand, technology, labor, and capital are the deciding factors in production and they are controlled by the monetary policy. The fiscal policy in some instances worked negatively in countering the great recession since it led to higher inflation levels that destabilized the economy further. The United States also experienced a decrease in government savings courtesy of the fiscal policy that affected both private and government saving rates. The government also accumulated huge debts that ended up burdening the taxpayers in both the short run and long run (8-20).
The long run effects presented by the implementation of the monetary and fiscal policy
The United States had the primary goal of restoring its economic stability after the great recession and the implementation of the monetary and fiscal policy aided this in the long run. The Federal Reserve System, also known as Fed in the United States played a great role in the implementation of the monetary policy. For instance, in the wake of this great recession, the system had the duty of controlling the government’s expenditure and the taxes it imposed on its people. In this case, the monetary policy influenced the demand of goods and services and continues to do so in the long run.
It was also responsible for ensuring that interest rates were either raised or lowered according to the economic needs at the moment. Fed’s prime long-term goals included the creation of employment opportunities, sustaining the output as well as ensuring that the prices remained stable no matter the economic circumstances. These are embodied in the available technological know how, saving preferences exercised by the people and work effort not withstanding. In this era of the great recession, Fed successfully stimulated the economy through the monetary policy by reducing the interest rates.
This was however not a smooth transition since it came with high inflation which was detrimental to the US economy. Inflation further destabilized the economy as uncertainties took over price controls. Interest rates were bound to become higher and this hindered the economic growth. Business were also headed for collapse in such a situation as the people suffered the blunt of high living costs (Federal Reserve Bank of San Francisco 1-3).
For instance, more employment opportunities continued being created as the economy stabilized. Fluctuation of prices was less now as stability settled in and the citizens were living more comfortably. To date, they are experiencing more stable prices unaffected by inflation and this has led to higher living standards. In addition, interest rates have been moderated and the process continues. People have also been encouraged to save more since the risk of losing money to inflation and instability have been significantly reduced.
The business fraternity have also benefited highly from the implementation of the fiscal and monetary policy since they are now able to invest more. This has however not been without major challenges since sacrifices have had to be made to ensure that both the employers and employees are cushioned. Inflation comes with high cost of production and this leads to redundancy of employees as businesses struggle to remain afloat. On the other hand, the living costs escalate and this leads to low living standards since the people cannot cope with the high cost of living reflected in accommodation, healthcare, education, and food among other essentials. These may weaken the economy in the long run and the recovery process is normally a slow one (Levy 1-7).
Conclusion
The Great Recession shook the world’s superpower and for once in many years, the United States was in a major financial crisis. Owing to the September 11th terrorist attacks as well as the dot.com bubble collapse, immediate measures had to be adopted to curb the crisis. This led to the implementation of the monetary and fiscal policy that worked hard towards salvaging this ailing economy. This implementation had its impacts in both the short run and long run and the Federal Reserve System (Fed) which is the U.S. central bank had to chip in with the intention of stabilizing the economy. This it managed by influencing demand and monitoring interest rates. However, the implementation of the monetary and fiscal policy came with its hiccups since before it gained ground, inflation, loss of employment and low living standards were experienced across the United States.
Works cited
Auerbach, Alan. Fiscal policy: Lessons from economic research. USA: Massachusetts Institute of Technology, 1997. Print.
Federal Reserve Bank of San Francisco. “U.S. Monetary policy: An introduction.” FRBSE 1.0(2010): 1-3. Print.
Levy, Mickey. “Don’t mix monetary and fiscal policy: Why return to an old, flawed framework? The economic and budget outlook 2.1(1993): 1-7. Print.
McMillin, Douglas and Beard, Thomas. “The short run impact of fiscal policy on the money supply.” Southern economic Journal 47.1(1980): 122-135. Print.
Recession History. “United States recession History.” United States economy and Global Economic Recession 7(1999): 1. Print.
Weil, David. “Fiscal Policy. Concise Economics.” Library of economics and liberty 2.0(2008): 1-6. Print.