Fiscal Policy During The Great Depression

The Great Depression was the single most catastrophic economic failure in U.S. history. To just how significant the Great Depression was we must understand the life cycle of an economy. There are natural phases that any economy goes through which typically starts with a phase of expansion. This is when the economy is growing, and money is flowing freely. This expansion eventually reaches a peak, which is the next stage of the cycle, and the most output an economy will have is reached. After the peak has been achieved the next phase of contraction occurs which is when the economy is not as healthy as it has been, and unemployment rates begin to increase. The final phase is a trough which is when the economy has hit the lowest point of the cycle

Monetary policies are used to either improve the growth of output or prevent inflation that may be occurring. The direct influencers over monetary policy is the Federal Reserve which is the has a policy-making body that closely monitors monetary policy and the decisions that must be made. Monetary policy is not something that is controlled by the government unlike fiscal policy which “refers to the actions of a government…as related to taxation and spending”. (R. R., n.d.) The nation’s government can directly influence the economy by one of the two ways just described. When taxes are lowered the intent is for individuals to spend that money in hopes to stimulate the overall economy. The other way the government uses fiscal policy is by spending government money on major projects such as improving infrastructure. By investing in new roads, bridges, etc., there are jobs produced which not only lowers unemployment rates but also creates new consumers. These consumers are now directly impacting the GDP with their purchases and economic activities. Both policies have been used to stabilize the economy and the Great Recession in 2008 was a model example of

history. The GDP plummeted roughly 4% and unemployment spiked to 10% throughout the recession (R. R., n.d.). For drastic times called drastic measures by the Fed as well as the U.S. government. The Fed maintained extremely low federal fund rates for an extended period to combat the recession. They also used programs such as the large scale asset purchase (LSAP) to “help push down longer-term public and private borrowing rates”. (R. R., n.d.) It was not only the Fed and monetary policies that assisted in the economic recovery but also fiscal policy. The U.S. government responded to this crisis by taking introducing a stimulus to the nation. The stimulus provided things such as tax rebates to encourage individual consumers to help stimulate the economy. The stimulus package also “lowered federal taxes by about 5 percent in 2008, reducing the estimated average effective federal tax rate from 19.6 percent to 18.6 percent and cutting federal revenue by nearly $120 billion in fiscal years 2008 and 2009 (Kenny,T., 2017). Although many economists believe that monetary policies are more effective than fiscal policies it was evident during the Great Recession that both policies used together allowed for the recovery of a nation on the cusp of a