The growth of an economy is measured by the rise in the GDP in a country’s financial quarters. Therefore, an economy is considered to be in recession when its GDP reads negative in two or more consecutive quarters (Amadeo, 2011). Nonetheless, the decrease in economic activities in an economy can also cause an economic recession. Such a decrease in economic activities is measured through economic parameters. These include the GDP, real income, the rate of employment, industrial production as well as wholesale-retail sales (Amadeo, 2011). In measuring the economic performance of the country, these are the most appropriate indicators of economic development.
Fiscal policies are government-spending policies, which have an impact on the overall macroeconomic growth (Amadeo, 2011). Government spending policies influence the rate of demand for the local currency. This affects the value of the currency either positively or negatively. Such policies influence taxation rates, interest rates, and federal spending and are aimed at controlling the overall performance of the economy (Amadeo, 2011). High tax rates limit the number of individuals willing to invest in an economy hence reducing business activities. High-interest rates are mostly given by the Federal Reserve Bank also reduces borrowing causing a low level of spending and investments. Government-spending policies increase the amount of currency in circulation (Amadeo, 2011).
Monetary policy on the other hand is a regulatory policy that determines the growth of the money supply in an economy. Such policies have a direct impact on interest rates hence affecting borrowing and by extension the economic activities in an economy. Monetary policies are maintained through increasing the interest rates charged by the Federal Reserve banks on money lent to other commercial banks (Amadeo, 2011). This can also be achieved through changing the amount required in reserves of the commercial banks (Amadeo, 2011). In America, the Federal Reserve Bank has the mandate to create monetary policies and through this, the American government has been able to control its economy. The rate of inflation increases with the increase in the rate of money supply (Carvalho, Eusepi, & Grisse, 2012). However, a very slow money supply in an economy upsets economic growth.
The 2007/2008 economic recession was one of the worst downturns to have ever hit the American economy. The recession prompted the central banks and government authorities to formulate monetary and fiscal policies to counter its negative effects on the economy. The policies were very instrumental in retaining the economic impact of the great recession by reducing and preventing deflationary pressures during the recession period (Carvalho, Eusepi, & Grisse, 2012). The policies were very successful in changing the economic growth rate of America hence improving the expectations of many economists. The monetary expansion policies influenced the rate of inflation while the fiscal policies increased the economic growth (Carvalho, Eusepi, & Grisse, 2012).
Although the recession was effectively handled by the use of monetary and fiscal policies to counter its effects, there were other unconventional methods used to help the economy to recover from the impacts thereof. This shows how bad the economic downfall in 2007/2008 was in comparison to other recessions in the past. However, the monetary and fiscal policies used in response to the downfall played very crucial roles in restoring the economic strength of the American economy. The two discussed policies are therefore the main factors to consider when dealing with an economic downfall and their use in the 2007/2008 recession shows their effectiveness in solving an economic failure.
Amadeo, K. (2011). Recession.
Carvalho, C., Eusepi, S., & Grisse, C. (2012). Policy Initiatives in the Global Recession: What Did Forecasters Expect? In economics and finance, 18(2), 1-5.