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Monetary and Fiscal Policy: Great Recession

Updated on July 2, 2015
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Monetary Policy

Monetary policy is “the use of the central bank policies to influence the level of economic activity. The chairman of the Federal Reserve Board is required to report to Congress twice each year on its monetary policy” (Rittenberg & Tregarthen, 2012, pg.181/229). It is used to help the economy during a recession by regulating the money supply, which is influenced by interest rates. Fiscal policy is the “use of government purchases, transfer payments and taxes to influence the level of economic activity” (Rittenberg & Tregarthen, 2012, pg.181). With the fiscal policy, the government is able to regulate the expenditure and economy through taxes.

Monetary and fiscal policies both have long-term and short-term effects. Fiscal policy allowed the government to increase or decrease the rate of taxes, which in turn regulated its expenditure. Increasing and decreasing the rate of taxes aided the United Stated, during the Great Recession, in price stability and influenced the aggregate levels of the economy. The government was able to increase its spending and decrease tax rates; by taking this action the government was able to stimulate the aggregate demand. Stimulating the aggregate demand led to more money being able to be spent, which aided in economic stability. Monetary policy increased the amount of money in the economy and reduced the interest rates, which in turn released money into the economy and reduced government reserves. Monetary policy long-term effects are the rate of inflation. As more money is released into the economy, consumer spending increases. If consumer spending is not controlled, it leads to too much money in the market, causing inflation to increase. A high inflation rates slows down the growth of the economy.

The main policy used during the Great Recession, however, was the monetary policy because the fiscal policy takes too long to implement. The government tried to use the fiscal policy to stabilize the economy by reducing interest rates, however, reducing the interest rates was limited and the government had to use its reserves. The government implemented a stimulus plan to help improve the rate of unemployment, consumer spending and promote investment by re-establishing confidence in investors. The stimulus plan, created from monetary policy, helped to improve unemployment benefits, federal tax incentives, health, education, energy and infrastructure.

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    • devesh prajapati profile image

      devesh prajapati 3 years ago from New Delhi

      Great work shakka James on monetary and fiscal policies. But i have a question to ask you that, Is their any other way to solve inflation and deflation problem?

    • Shakka James profile image
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      Shakka James 3 years ago from Dallas, TX

      Thank you Schneider for reading my article and post

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      Howard Schneider 3 years ago from Parsippany, New Jersey

      Great analysis, Shakka. The Obama Administration tried a fiscal stimulus that worked to a smaller and slower degree. The monetary policy by the Fed was strong, immediate, and long lasting. Excellent Hub.