Question

There have been two recent examples of large scale fiscal policy in the US. After the Great Recession, Congress passed the American Recovery and Reinvestment Act (ARRA) in 2009. In 2017, Congress passed a tax reform bill.

Consider the state of the economy in 2009 for the ARRA and in 2017 for the tax bill.

What were the intended effects of each bill based on the state of the economy of the time?

What were the actual effects? (For the tax bill, you will have to look at the intent of the bill versus what the analyses think the effect will be.)

Do you think each bill is or will be effective? Do you think the government should intervene in the economy or let the economy self-correct?

Answer 1

1. The economy was in recession and the actual level of GDP in the economy was lower than potential level of GDP in the economy and thus, stimulus packages was needed by the government to increase overall aggregate demand in the economy. Thus, both the laws were aimed at increasing the level of aggregate demand in the economy.

2. The intended effects at the time the bills were passed were to increase aggregate demand and cover the recessionary gap in the economy by moving the actual level of GDP in the economy closer to the potential level of GDP in the economy.

3. The actual effects were the same as intended effects and the bills helped in increasing the overall aggregate demand by increasing government expenditure and reducing tax rates and helped the economy in moving out of recession.

4. Yes, each of the bill was effective. Yes, the government should intervene in the economy because the self correction process takes time and till that time of self adjustment economy cannot afford to be in recession as growth rate of GDP will suffer in the economy. Thus, government should intervene in the economy to correct recession.