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Demand-side Policies and the Great Recession of 2008

Textbooks and literatures define recession as the negative growth of GDP for at least two
consecutive quarters. This definition, though widely accepted, still remains to be so abstract.
More likely, when economy falls for two quarters, one could already say that there is the
existence of recession. The reason is because, expectedly, recession is preceded by some quarters
of short positive growth.
Economic scientist Wesley Clair Mitchell of the National Bureau of Economic Research
(NBER) purported that recession is the falling or stunting of economic activity manifested
through the GDP, which usually lasts for few months. The recession can be coupled of several
indicators like shortages in real income, increase in unemployment rate, instability of industrial
production and drastic shifts in wholesale-retail sales. Thus, according to Mitchell, it is nowhere
to hide recession when it can be so evidently affective to lives of the individuals. However, at
some instances, although NBER based its findings to conclusive supporting evidence, the
complete grasp to whole rescission is nonetheless arbitrary as to speak of the fast changing
There are established policies to fight against recession, to wit, these are the monetary
policy and fiscal policy (Bivens, 2005). The monetary policy is actually a set of standards that
enforces the control of supply of money in order to achieve a certain rate of interest in line of the
promotion of economic growth and stability. It is a government strategy to persuade or influence
economic activity thru some interventions and alterations of money supply and credits by a
certain monetary authority. In the case of United States Federal Reserve System (Fed), it
employs three probable ways to influence economic activity. These are the open-market
operations, discount rates and reserve requirements. The first means is far to be the most
applicable and common method to apply during recession. Shortly, it accomplished its mode of
intervention thru buying or selling some stocks of the government in order to spur the circulation
of money. This led to more money deposited in the bank (Fed), thus increasing its capacity to
lend, as well as, decreasing the interest yield resulting from hyper government stock bidding
(Tobin, 2008).
The other policy which is usually employed in tandem with the former is the fiscal
policy. This is done thru the manipulation of levels and allocations of taxes and government
expenses. The same with the goal of monetary policy, this too vibes stabilized economic growth
and improvement by decreasing unemployment rate paired with affordable prices of goods and
sufficient wages. In the case of taxes for example, the decrease of personal tax tends to stimulate
an increase in the spending of the consumers, the same with that reduction in the tax of corporate
sectors to pose increase in its investments. This is indeed a well off balance between government
expenditures, and money returns thru taxation, which can be so appropriate to the immediate
control of the necessity (Weil, 2008).
The indispensability of these tools was utilized during the 2008 recession. It was on this
recession that monetary policy and fiscal policy were used hand in hand to initiate recovery amid
the drowning economy. The monetary control was wielded in particular through the lowering of
interests, and at the same time, increasing the supply of money. The moved of Fed triggered the
investors to sign for more investments, thusly increase the job openings. On one hand, the fiscal
policy took role in the lifting of recession by significant reduction of taxes and increase of
government spending. The federal government herein applied the discretionary fiscal policy
which is supposed to be used in only sever recession. The government action revolved to a large
fiscal stimulus which centred to its overspending. It created large deficits which can be
significant adaptation to aggravated downturn (Tcherneva, 2011).


Bivens, Josh. 2005. Monetary Policy as Macroeconomic Stabilizer During the Great Recession.
Retrieved December 30, 2012 at

Fiscal Policy vs. Monetary Policy. 2012. Retrieved December 30, 2012 at

National Bureau of Economic Research. 2012. Retrieved December 30, 2012 at http://www.

Tcherneva, Pavlina R. 2011. Fiscal Policy Effectiveness: Lessons from the Great Recession.
Retrieved December 30, 2012 at

Tobin, James. 2008. The Concise Encyclopaedia of Economics: Monetary Policy. Retrieved
December 30, 2012 at

Weil, David N. 2008. The Concise Encyclopaedia of Economics: Fiscal Policy. Retrieved
December 30, 2012 at