Business cycles can result to some undesirable effects on an economy with a perfect example being the 2008/2009 global recession that resulted into negative economic growth and economic conditions in many countries. The recession left the US economy riddled with a number of economic problems that needed to be addressed in order to stabilize the economic system. Among the key objectives for the US government included increasing the GDP that had reduced significantly, reducing unemployment level that had risen from 5% to% and was is expected to rise to 10%, increasing private investments, stabilizing the market to address the problems of falling house prices, the falling stocks indices as well as the falling US household income level. (Barron & Lynch, 1989) In that respect, the discussion below explains the suitable fiscal policies that could be applied to address the problems making recommendation for two policies and citing their effects on the economy.
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Fiscal policy
Fiscal policy entails government intervention in an economy with an aim of influencing economic conditions through adjustments in government spending and taxation. The policy is necessary in this case since the US economy experienced problems that required intervention in order to stabilize the business cycle that had determined the economy’s status and conditions. The policy’s major focus is altering economic growth, employment level and achieving price stability like was necessary in US in early 2009. (Langdana, 2002) However, fiscal policy can take different forms like stabilizing expansionary and contractionery policies and the suitable policy for the US case are as discussed below.
Stabilizing policies
A stabilization fiscal policy seeks to increase economic growth, stabilize prices and increase employment level in addition to increasing private investments and household income hence being suitable for application for the US case. The policy focuses on counteracting the business cycle in a bid to achieve the objectives hence also being referred as countercyclical policy as a result of its nature of countering the business cycle natural ups and downs. Further, the stabilizing fiscal policy suitable for the US economy conditions in the early 2009 is the expansionary policy. (Barron & Lynch, 1989)
Expansionary policies
Expansionary fiscal policies entail an increase in government spending, reduction in taxes and/or increasing the transfer payments. In that respect, the US economy required application of any or a combination of the policies in order to stimulate the economy, reduce unemployment as well as close the fiscal gap. (Langdana, 2002) The two suitable policies that can be recommended to address the problems are an increase in government spending and a reduction in taxes as discussed below.
- Government expenditure increase
Through increasing the government spending that entails more expenditure on final goods and services by the government sector, the government boosts the production hence employment level as well as household income. (Romer, 2012)
Effects
The policy would increase aggregate demand hence stimulate the economy to growth. However, the policy also results to large government deficit and a reduced surplus. (Barron & Lynch, 1989)
- Tax reduction
With taxes being the government’s source of revenue from involuntary payments by people and businesses, this policy entails reducing taxes including personal and corporate taxes. This could be done through a reduction of the tax rate or through a rebate on paid taxes for businesses and/or individuals. By reducing the taxes, businesses and individuals would have more disposable income to spend and invest hence stimulating the economy. The policy is administratively easier to implement hence would be the most suitable to address the US economy’s problems. (Romer, 2012)
Effects
The reduced tax would increase disposable income that would enhance consumption, production, employment as well as increase the income level. The policy would also have the effect of increased private spending with individuals and businesses having more disposable income for investment purposes. In addition, the increased disposable income would spur growth in stocks indices and house prices. Thus, through the increase in aggregate demand, the policy would achieve increased economic growth and achieve stability. (Barron & Lynch, 1989)
Conclusion
In light of the US economy’s status in the early 2009, the discussion has demonstrated that the most suitable economic policy would be an expansionary stabilizing fiscal policy that focuses on increasing government spending as well as reducing taxes. The two policy measures would stimulate the economy through increased aggregate demand that would spur production, employment level increase as well as enhance private investments. In that respect, the economy would experience increased GDP growth and household income level would rise hence addressing the business cycle problems. However, a combination of increased government spending and reduction in taxes would require the government to increase its borrowing hence increasing its deficit and debt level.
Works cited
Barron, John and Lynch, Gerald. Economics. Boston: Richard D. Irwin Inc, 1989. Print.
Langdana, Farrokh. Macroeconomic policy: Demystifying Monetary and Fiscal Policy. New
York: Springer. 2002. Print.
Romer, David. Advanced Macroeconomics. 4th ed. New York. McGraw/Hill-Irwin. 2012.
Print.
