Macroeconomics policy responses
The great recession largely affected the economic status of the United States beginning from 2007 to 2009. Some of the sectors that were greatly affected and created financial instability are investments, employment, inflation and work output. There was an increase in the unemployment rate. This spread to the Europeans and even the United Kingdom. Macroeconomic responses were then created to fight the challenges brought about by the great recession. This includes the monetary and fiscal policy.
Fiscal policy involves use of the government revenue, earned through tax to influence economic path over a period of time. Through this strategy changes occurred in the spending of taxes shifting the demand outwards in expansionary fiscal policy and inwards in the contractionary fiscal policy. Expansionary fiscal policy caused an increase in demand levels by increasing the government earnings and reducing the taxation rates. Contractionary fiscal policy involved increasing the demand beyond the potential GDP leading to inflation (Breuss,2015). This decreases the government spending and increases the amount of revenue earned through taxes. Within a period of time, there was growth in the quantity and quality of resources. This lead to an increase in the labor force and businesses invested in new capital. There was also an improvement in the technological levels. An increase in the levels of supply and demand was also experienced. Due to those changes the economy started growing and becoming healthy.
Monetary policy was carried out when the central banks of US and European regulated its banking systems by using its power to engage in countercyclical or against the business action cycle activities (Coenen, Straub, & Trabandt, 2012). Expansionary monetary policy is used to increase the supply of money, amounts of loans, decrease interest rates and increasing aggregate demand. If inflation threat occurs, the central bank uses contractionary monetary policy to decrease the supply of money, reduce the amounts of loans and increase interest rates. This in turn reduced the levels of demands.
References
Coenen, G., Straub, R., & Trabandt, M. (2012). Fiscal policy and the great recession in the euro area. American Economic Review, 102(3), 71-76.
Breuss, F. (2015). Causes, effects and policy responses. Routledge handbook of the economics of european integration, 331.