Article Summary
On important objective of fiscal policy is to stabilize the economy from cyclical fluctuations. The countercyclical policies aim at preventing severe downturn of the economy. A recession leads to loss of jobs and severe retardation in growth. The financial crisis of 2008-09 that triggered the Great Recession was worst of its kind but was not for long as the government had taken timely and appropriate fiscal and monetary measures to prevent the economy from falling further into a trough. Without the heavy stimulus package the GDP would have fallen by 14 per cent but the fall could be arrested at 4 per cent . The economy would have been in recession for a longer time with a huge increase in unemployment without the fiscal expansion.
The bail-out is often a matter of debate with a large section of people speaking against the stimulus program that had cost the government a huge amount of tax payers’ money. But at that moment financial stability was of prime importance to save the economy. Similarly, the automobiles sector would have crashed without the government relief. It would have lead to a huge amount of loss of jobs. The tax cuts and increased government expenditure have also boosted consumer spending leading to higher aggregate demand resulting in higher prices that have stimulated production. The increased production has increased income and employment that has ultimately brought the economy out of recession.
The situation of increase in aggregate demand (AD) has been depicted in the figure below. With government fiscal stimulus the aggregate demand increases, shifting the AD curve upwards from AD0 to AD1. With the increase in aggregate demand the price rises, leading to higher supply along the supply curve. Thus income or output has increased from Y0 to Y1.
AD1
AD0
Y0 Y1 Y
Works Cited
Blinder, Alan S. and Mark Zandi. "Don't Look Back in Anger at bailouts and Stimulus." The Wall Street Journal 15 October 2015: 3. English.
Mankiw, G.N. Macroeconomics. Macmillan, 2013.
