Question

The U.S. economy is over a decade removed from the Great Recession. For several years after the Great Recession officially ended, the U.S. grew at an historically slow rate. Analyze the causes of the slow increases in U.S. GDP. Include in your paper: An analysis of the monetary policy approach the Federal Reserve took to the recovery An analysis of the fiscal policy approach the Federal Government took to the recovery An analysis of how the attempts to influence GDP in the short-run negatively affect GDP in the long-run An explanation of why the unemployment rate dropped rapidly in the United States despite low rates of increases in GDP An identification, as appropriate, of the economic principles (from Module 1) that factor into your analysis?

Answer 1

The U.S grew at a historically slow rate because the monetary policy which followed expansionary measures wherein the interest rates were reduced to almost zero during the recession helped the economy pick up pace, but there was limited output gap left after the recession as the interest rates could not be turned negative. Thus even though the monetary policy helped in reviving the economy during the recession there wasn't enough monetary room left to revive the economy after the recession. For example a decline in interest rates from 5% to 0.3% would drive extensive amount of credit growth, but a decline from 0.3% to 0.1% is not going to stimulate the economy as much, which is what happened after the crisis.

On the other hand the fiscal stimulus was through increase in the debt levels which dented the future economic growth rate as the government had to spend vast amounts after the recovery on repaying the debt it seeked and thus cutting down on capital expenditure which could have driven the economy. Thus most of their revenue collection went on repaying the debt burden. Hence, even though the GDP picked up in the short run because of higher fiscal spending, the debt burden increased and the debt to GDP ratio, which led to slow economic growth rate in the long run.

The unemployment dropped rapidly because fiscal stimulus and other social benefit measures played a key role in reducing the level of unemployment rates. Thus the GDP level should also have increased substantially as people started to earn, but the consumer confidence after the recession declined drastically as people started to shy away from spending too much and started saving as they were apprehensive of another recession around the line, this led to slower than expected GDP growth rate as consumer's spending slackened. Private consumption is the main driver of U.S GDP growth.