Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question based on Reading below: Fiscal Policy Played a Prominent Role in the Great Recession Unsustainable increases in bond and housing prices and excessive borrowing

Question based on Reading below:

Fiscal Policy Played a Prominent Role in the Great Recession

Unsustainable increases in bond and housing prices and excessive borrowing to purchase risky assets led to the financial market meltdown in the summer and fall of 2008, which in turn further weakened economic activity. As former Fed chair Janet Yellen, then President of the Federal Reserve Bank of San Francisco, explained in early 2009:

Once this massive credit crunch hit, it didn't take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. . . . Consumers [pulled] back on purchases, especially on durable goods, to build their savings. Businesses [canceled] planned investments and [laid] off workers to preserve cash. And, financial institutions [shrank] assets to bolster capital and improve their chances of weathering the current storm.[8]

The first step of re-establishing financial market stability fell largely to the Fed and the Federal Deposit Insurance Corp., which acted to restore liquidity that had evaporated in the crisis due to falling asset prices and the failure or near-failure of major financial institutions. Most notably, Congress eventually agreed to the controversial Troubled Asset Relief Program (TARP), which established a $700 billion fund to give banks the capital they needed to continue to make loans.

To address the faltering economy, the Federal Reserve cut its target interest rate essentially to zero between October and December 2008, when it adopted a target range of 0 to 0.25 percent, which it maintained for the next five years. With no room for further conventional monetary stimulus via cuts in short-term interest rates, the Fed turned to unconventional measures, notably what would eventually be three rounds of large-scale purchases of longer-term assets a policy known as quantitative easing to try to lower longer-term interest rates and continue to provide needed stimulus.

On the fiscal policy front, President Obama and Congress enacted the American Recovery and Reinvestment Act (ARRA) in February 2009. ARRA's roughly $830 billion of tax cuts and spending measures were at the time by far the largest package of "Keynesian stimulus" in the post-World War II era. The Congressional Budget Office (CBO), in its 2015 assessment of the impact of ARRA on employment and output, grouped the various provisions into the following four broad categories:[9]

  • Providing funds to states and localities for example, by raising the federal government's share of Medicaid costs, providing funding for education costs, and increasing financial support for some transportation projects;
  • Supporting people in need such as by extending and expanding unemployment benefits and increasing benefits under SNAP;
  • Purchasing goods and services for instance, by funding construction and other investment activities that could take several years to complete; and
  • Providing temporary tax relief for individuals and businesses ranging from expansions of the Earned Income and Child Tax Credits and a new Making Work Pay tax credit to creating enhanced deductions for depreciation of business equipment and raising exemption amounts for the alternative minimum tax (AMT).

Q: Whatmonetarypolicy measures were adopted by the Fed to fight the recession? Which of those measures wereunconventionalmonetary policies? [There are 2 unconventional monetary policies, I know that one is quantitative easing, but I could not figure out the other one].

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Economics

Authors: Thomas Pugel

16th Edition

0078021774, 9780078021770

More Books

Students also viewed these Economics questions

Question

Identify the three states of the economy in terms of TE and TP.

Answered: 1 week ago

Question

3. An initial value (anchoring).

Answered: 1 week ago

Question

4. Similarity (representativeness).

Answered: 1 week ago