ECO372_p1_2023_Week5Discussion

Duringj aj recessionj aj fiscalj policyj hasj limitations,j butj thej mostj limitingj factorj isj probablyj thej

recognitionj lag.j Thisj isj aj lagj betweenj whenj actionj isj neededj forj thej economyj butj isj recognizedj

atj aj laterj pointj inj time.j Aj fiscalj policyj willj havej lessj effectj becausej ofj thisj lag.j Therej isj alsoj anj

administrativej lagj whichj occursj whenj thej actionj isj requiredj butj itj isj thenj implementedj atj aj

laterj timej duringj thej recession.j Duringj thej recessionj aroundj COVID-19j thej governmentj spentj

aj lotj ofj moneyj inj thej healthcarej sectorj onj buildingsj andj equipmentj andj otherj medicalj

infrastructurej inj orderj toj fightj offj thej pandemic.j Thej governmentj alsoj spentj aj largej amountj ofj

fundsj onj subsidiesj forj thej Americanj peoplej toj survivej andj affordj theirj currentj standardj ofj

governmentj spendingj andj taxj policiesj toj influencej economicj conditions.j Inj thej past,j ourj

governmentj hasj usedj expansionaryj fiscalj policyj toj helpj bringj ourj economyj up.j Expansionaryj

fiscalj policyj includesj taxj cuts,j transferj payments,j rebates,j andj increasedj governmentj spendingj

onj projectsj suchj asj infrastructurej improvements.j Duringj thej covidj pandemic,j ourj governmentj

spentj anj insanej amountj ofj moneyj earlyj inj thej pandemicj toj helpj keepj peoplej whole.j Wej

receivedj multiplej stimilusj checksj alongj withj aj lotj ofj governmentj aidj forj smallj businessj andj

schools.j Mostj kidsj receivedj freej breakfastj andj lunchj eachj dayj alongj withj anj EBTj cardj forj

theirj otherj dailyj foodj needs.j People'sj studentj loansj werej forgivenj amongstj aj lotj ofj otherj debt.j

Fiscalj policyj isj knownj forj thej governmentj toj presentj thej economyj withj taxj cutsj andj spendingj

inj aj discretionaryj manner.j Thej fiscalj policyj usedj inj previousj recessionaryj periodsj isj knownj asj

presentj toj thej economyj thej currentj conditions.j Thej Unitedj Statesj hadj aj largej spendingj scalej inj

thej beginningj ofj thej pandemic.j Accordingj toj anj articlej thej spendingj wasj 50j percentj morej thanj

thej Unitedj Kingdom.j Itj isj differentj withj aj pandemicj recessionj andj aj normalj recessionj beingj

thatj theyj requirej differentj policyj response.j Thej pandemicj isj toj aimedj towardsj thosej whoj arej inj

needj ratherj thanj increasingj aggregatej demand.j Businessesj whetherj smallj orj bigj werej ablej toj

getj helpj toj keepj theirj companyj inj goodj standing.j Unfortunately,j therej arej alwaysj badj applesj inj

aj bunch.j Thej badj applesj arej thej onesj thatj canj makej thej helpj hardj toj getj inj thej future.j Ij readj

thatj peoplej werej gettingj loansj illegallyj andj somej gettingj loansj withoutj thej intentionj toj repayj

going.j Fiscalj policyj alsoj savedj thej Unitedj Statesj duringj thej Greatj Depression.j Monetaryj

policyj isj aj toolj forj thej Centralj Bankj whichj isj thej Federalj Reserve.

Currently,j thej Federalj Reservej isj inj thej processj ofj increasingj interestj ratesj toj putj thej brakesj onj

inflationj asj wej tryj toj recoverj fromj thej COVID-19j mandates,j shut-downs,j andj restrictions.

Government,j throughj thej centralj bank,j canj applyj differentj tacticsj toj handlej recessionj andj itsj

effectsj onj thej economy.j Inj thej previousj recession,j thej governmentj hasj beenj usingj thej

expansionaryj fiscalj policy.j Thej governmentj usesj thisj fiscalj policyj toj leveragej taxj policiesj andj

definej howj thej economyj spendsj them.j Thej expansionaryj fiscalj policyj usedj inj thej lastj

recessionj mainlyj allowedj thej governmentj toj employj variousj taxj cuts.j Withj thisj approach,j thej

governmentj increasesj discretionaryj spendingj inj somej way.j Duringj Covidj 19j recession,j thej

fiscalj policyj wasj completelyj differentj fromj thej normalj recession.j Therej wasj enormousj

spending,j especiallyj earlyj inj thej pandemic,j withj initialj debtj loadsj beingj normal.j Thej primaryj

Trump'sj presidencyj differsj fromj ordinaryj recessionsj duej toj thej factj Covidj 19j createdj aj forcedj

federalj shutj downj startingj inj Marchj 2020.j Thisj leadj toj aj recessionj goingj forwardj throughoutj

thej yearj andj continuingj intoj nextj year.j Comparedj toj thej everydayj recessionj thej Unitedj Statesj

governmentj decidedj toj goj alongj withj aj morej aggressivej spendingj policyj toj combatj thej Covid-

19j recessionj forj thanj thej 2008j recessionj duringj Obama'sj precedency.j .j Thej governmentj

federalj providedj PPPj loansj forj businessj whichj theyj didj notj havej toj payj back,j aj 1,200j stimulusj

paymentj (caresj act)j forj Americansj andj aj bunchj ofj variousj differentj breaks.j Inj Illinoisj thej statej

governmentj providedj additionalj unemploymentj moneyj throughj federalj funding.j Duringj thej

recession,j foodj productionj andj autoj andj otherj manufacturingj hadj beenj hitj thej toughestj inj

whichj asj althoughj withj Covidj 19j itj affectedj thej entertainmentj (moviej theatersj etc.)j andj

millionsj ofj Americansj lostj theirj jobsj whilej smallerj businessesj closed,j hadj toj layj offj allj

employeesj andj couldj notj recoverj beingj forcedj toj closej forj business.j Whilej bigj businessesj

remainedj openedj duringj thej covid-19j withj restrictions.j Asj farj asj previousj recessions,j byj

.Influencesj fromj thej federalj governmentj toj thej economyj isj usuallyj throughj givingj taxj breaksj

andj increasingj thej authorities'j spendingj capacityj whichj wasj knownj asj Expansionaryj monetaryj

policyj .j Alsoj throughoutj thej previousj eraj thej unemploymentj willj growj andj aj therej isj aj naturalj

decreasej inj earnings.j Duringj previousj recessionaryj durationsj thej economicj policyj thatj hasj

beenj usedj isj thej expansionaryj monetaryj coverage.j Expansionaryj monetaryj policyj canj growj anj

firstj wasj quarantiningj it'sj population,j toj reducej thej spreadj ofj thej virusj throughj closej contact,j

andj second,j limitingj thosej deemedj essentialj toj continuej withj employmentj inj person.j Therej

werej manyj factorsj ofj thej pandemicj thatj affectedj thej recession,j suchj asj shortagesj ofj goods,j andj

aj sharpj declinej inj internationalj trade,j butj thej factorsj affectingj employmentj andj quarantiningj

thej purchasingj populationj werej thej mostj majorj factorsj underj governmentj control.j Inj previousj

recessions,j thej governmentj wouldj activelyj lookj toj increasej employmentj toj fullj naturalj

employment.j However,j duej toj thej factj thatj mayj peoplej werej quarantinedj inj theirj homes,j fullj

employmentj wasj drasticallyj reducedj acrossj thej country,j andj couldj notj bej increasedj untilj allj

fearsj ofj thej virusj spreadingj couldj bej alleviated.j Anotherj majorj differencej withj previousj

recessionsj wasj thej quarantinedj consumerj population.j Thej governmentj increasedj spendingj byj

broken,j foodj shortagesj werej prevalent,j andj manyj businessesj werej stillj closed,j thej stimulusj didj

notj havej nearlyj asj muchj affectj asj couldj bej expectedj inj previousj recessions.j Thej fiscalj policyj

duringj thej previousj recessionaryj periodj thatj arej expansionaryj fiscalj policyj ,causej thej

expansionaryj fiscalj policyj willj allowsj thej governmentj toj influencej thej economicj conditionsj

byj doingj taxj cutsj andj increasesj forj governmentj spendingj anj butj theyj arej threej mainj typesj ofj

fiscalj policyj whichj arej neutralj policyj expansionary,j contractionaryj andj cuzj thej governmentj

Mayj lowerj taxj racesj arej increasedj toj spendingj toj encouragej demandj economicj causej itj mayj

raisej ratesj orj cutj spendingj toj slowj downj thej economy,Thej twoj majorj examplesj ofj

recession.j Thej lastj recessionj —j thej Greatj Recessionj —j wasj aj starkj reminderj ofj thej needj toj

lessenj thej humanj hardshipj andj economicj dislocationj associatedj withj aj recession.j Itj leftj keyj

lessonsj forj policymakers,j whoj shouldj nowj usej aj widej arrayj ofj availablej policyj toolsj toj keepj

thisj andj futurej downturnsj asj shortj andj shallowj asj possible.j Fiscalj Policy

policyj whichj isj thej nationalj expendituresj andj taxationj employedj toj stabilizej thej economyj

(https://www.britannica.com/topic/fiscal-policy)

Fiscalj Policyj Tools

Governmentj expendituresj (G)j whichj arej allj Federal,j State,j andj Localj governmentj purchasesj

fromj paperj clipsj toj aircraftj carriers.

Taxationj (T)j whichj isj impositionj ofj compulsoryj leviesj onj individualsj orj entitiesj byj

governments.j Taxesj arej leviedj inj almostj everyj countryj ofj thej world,j primarilyj toj raisej revenuej

forj governmentj expenditures,j asj wellj asj toj stabilizej anj economyj

(https://www.britannica.com/topic/taxation)

Expansionaryj Fiscalj policyj isj implementedj duringj aj contractionj onj thej businessj cycle.

Expansionaryj Fiscalj policyj includesj increasingj Gj and/orj decreasingj T.

Thisj allowsj Aggregatej Demandj toj shiftj toj thej rightj andj movej anj economyj towardj growth.

Contractionaryj Fiscalj policyj isj implementedj duringj anj expansionj onj thej businessj cycle.

definedj toj includej thej directives,j policies,j statements,j andj actionsj ofj thej Fedj thatj influencej

futurej perceptions.j However,j thej Fedsj cannotj controlj thej inflationj directly;j instead,j indirectlyj

byj affectingj thej moneyj supply,j itj isj theorizedj thatj monetaryj policyj canj establishj rangesj forj

inflation,j unemployment,j interestj rates,j andj economicj growth.j Thej Fed’sj primaryj missionj isj

toj ensurej thatj enoughj moneyj andj creditj arej availablej toj sustainj economicj growthj withoutj

inflation.j Ifj therej isj anj indicationj thatj inflationj isj threateningj ourj purchasingj power,j thej Fedj

mayj needj toj slowj thej growthj ofj thej moneyj supply.j Itj doesj thisj byj usingj threej tools—thej

discountj rate,j reservej requirementsj and,j mostj important,j openj marketj operations.

Monetaryj Policyj Tools

Openj marketj operation:j Thisj isj thej toolj thatj thej Federalj Reservej usesj thej mostj frequentlyj (onj aj

dailyj basis)j monetaryj policyj toolj toj involvesj thej buyingj andj sellingj ofj governmentj securitiesj

inj orderj toj influencej short-termj interestj ratesj andj thej growthj ofj thej moneyj andj creditj

aggregates.j Wheneverj anj increasej inj thej growthj ratej ofj thej moneyj supplyj andj creditj isj needed,j

willj decreasej thej moneyj supplyj byj sellingj securities.

Thisj isj donej onj aj dailyj basisj andj makesj incrementalj changesj toj thej moneyj supply.j Inj aj sense,j

openj marketj operationsj tweakj thej moneyj supply.

Reservej Requirements:j Arej thej requirementsj regardingj thej amountj ofj fundsj thatj thej bankj

mustj holdj inj reservej againstj depositsj madej byj theirj customers.j Thisj moneyj mustj bej inj thej

bank'sj vaultsj orj atj thej closestj Federalj Reservej Bank.j Thisj toolj isj usedj toj maintainj thej

minimumj amountj ofj physicalj fundsj inj theirj reserve.

Reservej requirementj changesj arej notj madej veryj oftenj atj all.j Theyj arej aj policyj usedj inj anj

extremej economicj situation.

supplyj byj decreasingj thej reservej requirementj allowingj banksj andj otherj financialj institutionsj

toj loanj outj aj greaterj fractionj ofj thej deposits.

willj decreasej thej moneyj supplyj byj increasingj thej reservej requirementj restrictingj evenj morej

Discountj Rate:j interestj ratej chargedj commercialj banksj andj otherj depositoryj institutionsj forj

policyj isj notj usedj veryj often;j however,j thej Fedj isj increasingj thej discountj ratej today.

discountj ratej whichj makesj borrowingj forj consumptionj andj investmentj friendlier.

willj increasej thej discountj ratej makingj savingsj morej attractivej thanj consumptionj andj

investment.

aj healthy,j sustainablej level.

Inflationj isj causedj byj thej demandj sidej orj thej supplyj side.

Twoj Causesj ofj Inflation

Demand-Pullj Inflationj isj aj generalj increasej inj thej overallj pricej levelj duej toj anj increasej inj

aggregatej demand.

Thisj typej ofj inflationj isj demonstratedj byj anj outwardj shiftj toj thej rightj ofj thej Aggregatej Demandj

curve.j Inj smallj increments,j itj demonstratesj creepingj inflationj whichj indicatesj aj healthy,j

growingj economy.j Inj largerj increments,j itj mayj demonstratej gallopingj orj hyperinflationj whichj

arej destabilizingj toj thej economy.

Also,j thisj typej ofj inflationj isj demonstratedj byj thej expansionaryj phasej onj thej businessj cycle.

Thisj typej ofj inflation,j ifj consideredj creepingj inflation,j isj anj indicatorj ofj aj healthy,j growingj

economyj duej toj thej increasesj inj pricej levels,j decreasesj inj unemployment,j andj thej increasesj inj

GDP.

Thisj typej ofj inflationj isj demonstratedj byj anj inwardj shiftj toj thej leftj ofj thej Aggregatej Supplyj

curvej duej toj anj increasej inj pricej and/orj decreasej inj availabilityj ofj aj significantj inputj (resource)j

intoj thej productionj process.