1

Demand-side Policies and the Great Recession of 2008

Author’s Name

Institutional Affiliation

Course No

Instructor’s Name

Date
Demand-side Policies and the Great Recession of 2008 2

The great recession of 2008 caused a significant impact on economies across the

globe. The recession associated itself with high rates of unemployment, reducing Gross

Domestic Product of economies, and posing high inflation rates. During a decline in

economic performance and a drop in the stock market accompanied by unemployment and a

reduction in the market for houses, a country experiences a recession. During the recession

period, much blame is put on the governance and the administration as a whole. Heads of

federal reserves also become responsible in these scenarios. The underpinning effects of the

economic recession of nations' productivity play a critical role in reducing the ability to

utilize resources and hence creates high inflation rates adequately.

Fiscal policies involve applying government spending and tax policies to impact the

country's economy over some time. These policies provide a declarative structure that the

government uses to calculate expenditure costs and the demand for resources. During a

recession, fiscal policies enable governments to prioritize their capital projects and plan

sustainable spending policies in the nation.

Fiscal policies for expansion enhance aggregate demand for commodities by

increasing the government's spending rate or only reducing taxes. The system can either

cause an increase in consumption through raised disposable incomes obtained after reducing

personal taxes, raising after-tax profits to increase investment costs, or increasing the

government's purchases through federal spending on finished products and services.

During the 2008-2009 economic recession period, the U.S. increased its government

spending. The graphical results indicated that the quantity of output was below the GDP. The

increased aggregate demand resulting from the introduction of the expansionary fiscal policy

moved the economy creating new equilibrium levels of the GDP(Arestis, 2012). Hence,

during the 2008 Great Recession period, the U.S. incurred a loss of 3.1% of its economy,

with its unemployment rate doubling from 5% to 10% in just a year(Blanchard, Jaumotte &
Demand-side Policies and the Great Recession of 2008 3

Loungani, 2014). The expansionary fiscal policy triggered productivity by reducing taxes and

increasing government spending.

On the other hand, monetary policies influence the supply and demand for money

obtained by collecting interest rates. They also involve open market operations as well as

quantitative easing. The country's central bank usually creates monetary policies. Monetary

policies have a significant effect on lending and mortgages(Summers, 2015). When applying

the financial system, homeowners incur high-interest rates, unlike those who benefit from the

savings. The above policy has a limited impact on the supply-side of the economy.

Monetary policies used in the Great Recession period of 2008 involved cuts in interest

rates and stimulated nations' spending and investment. Upon its application, the system

weakened the exchange rate to aid exporters in responding to the rising demand for

commodities during this period. The step enabled the economy to stir up growth. According

to the Keynesian model, money supply in the economy and the aggregate GDP have an

indirect link(Hammes, 2015). He asserts that when an expansionary monetary policy is in

place, the banking system increases the supply for payable funds, resulting in a fall in interest

rates.

Conclusion

The global recession of 2008 was unique with the initial classical view of addressing

unemployment through the labor market being challenged with the Keynesian model that

emphasizes the impact of demand-side policies to spur economic growth. As outlined in the

model, the fiscal policies demonstrated the ability to influence economic growth during the

Great Recession. These policies acted as a stimulus package to prevent the economy from

dropping during the 2008 period. Lowering interest rates and increasing government

spending enabled many nations, including the U.S., to increase their GDP and reduce

employment rates during the recession.

Demand-side Policies and the Great Recession of 2008 4

References

Arestis, P. (2012). Fiscal policy: a strong macroeconomic role. Review of Keynesian

Economics, (1), 93-108.

Blanchard, O. J., Jaumotte, F., & Loungani, P. (2014). Labor market policies and IMF advice

in advanced economies during the Great Recession. IZA Journal of Labor Policy, 3(1), 2.

Hammes, J. J. (2015). Political economics or Keynesian demand-side policies: What

determines transport infrastructure investment in Swedish municipalities?. Research in

Transportation Economics, 51, 49-60.

Summers, L. H. (2015). Demand side secular stagnation. American Economic Review,

105(5), 60-65.