Question

Examine the fiscal policies in place at the start 2008 in relation to their effects on macroeconomic issues. For instance, consider level of government spending, taxation, subsidies, unemployment benefits, and so on.

Analyze new fiscal policy actions undertaken by the U.S. government throughout the time period by describing their intended effects, using macroeconomic principles to explain the actions. 

Explain the impact of the new fiscal policy actions on individuals and businesses within the economy by integrating the macroeconomic data and principles.

Answer 1

2008 saw a recession started due to subprime crisis in USA. This led to many financial companies going down. US economic recessionary impacted world economy and overall growth rates were affected.

Federal reserve had to pitch in to correct economy. Govt. gave bailout packages to many financial firms through expansionary fiscal policies. Federal reserve reduced interest rates to increase consumption in an economy as a part of expansionary monetary policy. Since then interest rates have been very low. Federal reserve had low reserve rates and also low discount rates.Through open market operations they bought many govt. bonds to increase liquidity in the market. This policy worked well and US economy is finding ways to grow. In 2018, unemployment decreased and economic growth rates also went up.

This intervention by govt. and federal reserve can be explained through Keynes perspective. Keynes believed that when economy is in recession, govt. investments can shift aggregate demand to right without increasing price levels as economy has 'spare capacity' in the form of unemployed resources that are used by businesses. As shown in fig. below, AD1 with real GDP of Ye will shift to right without price levels changing till it reaches to Yp. This has been observed to be true in US economy as reduced interest rates and govt. bailouts increased business and consumer confidence and AD shifted right.

However, this has increased USA govt. debt manyfold and USA needs to be careful in future.