Question

In: Economics

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the...

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the face of The Great Recession which began in 2007. Focus only on fiscal policy. Do not include information about other policies such as monetary policy, healthcare, military spending, trade agreements, foreign affairs, etc.

Answer the following questions:

1. Describe the main tools of fiscal policy and when it is appropriate to use them.

4. What specific fiscal policy measures did the Obama administration use, and what was the purpose of these actions?

5. Comment on the budget deficit under the Obama administration. Do you believe that the deficit was justified? Why/Why not? Support your answer using arguments from economic theory.

6. Describe the “lag effect”, sometimes called the “response lag”. Does this apply more to fiscal policy or to monetary policy?

Solutions

Expert Solution

1)

Fiscal policy tools are:

  • Expenditure
  • Tax.

Expenditure and tax are main tools of fiscal policy. Government uses these tools to correct business cycles. During boom phase, government uses contrationary fiscal policy and expansionary fiscal policy is followed during the recessionary cycle.

4)

Obama administration used expansionary fiscal policy thereby it increased expenditure of government and sought to control taxes. Bailout package by government was foremost example of expansionary fiscal policy. it considerably helped economy to recover from recession.

These actions of government were aimed at infusing aggregate demand in economy. further, these actions were targeted at restoring private investors confidence in economy.

5)

Increase in government expenditure led to rise in government deficit, but such deficit was required to correct disequilibrium in economy. Government deficit drove up economic pace and restore economic growth again. Such speedy recovery was not possible in presence of balanced budget. Thus, government deficit is justified. Keynesian theory supports such actions of government, it believes that economic system is subject to fluctuations and government must monitor it actively,

6)

Decision lag effects are usually higher in fiscal policy relative to monetary. Monetary policy is operated through the well organized committee and experts, thus decision making mechanism in such committee is speedy. on other side, fiscal policy is operated through the politicians, and some experts. Politicians have great say on such decisions, Hence, decision making process is lengthy. Thus, decision lags are larger in fiscal policy.


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