Economics Research Paper: Recession

Expansionary Fiscal and Monetary Policy Effects on the Recession

“As Economy Gains Strength, Fed Weighs What's Next”

The Miami Herald

4/25/2011

Introduction:

Throughout the recession, the Federal Reserve has been implementing expansionary monetary policies in order to stimulate the economy. One such Fed initiative was Quantitative Easing, a program started late in 2010 that would see the central bank buy up government bonds and is set to expire this June. The expiration of this program will signal an end to almost all of the significant measures taken by the government to stimulate the economy throughout the recession. Right after Quantitative Easing was announced in August of 2010, worries that the economy would retreat back into a recession have nearly extinguished as the private sector has continued creating jobs and the stock markets have reached their highest point in the last three years. However, there is concern regarding the recent increases in the prices of food and oil that have raised the fears of significant inflation. Due to this, several regional Fed chiefs have indicated their desire to raise interest rates to fight any possible inflation, pointing to the fact that the Fed’s interest rate has been near zero ever since December of 2008. However, most Fed directors including the current Chairman, Ben Bernanke, believe interest rates should stay low longer and only anticipate a slight increase in consumer inflation. Meanwhile, Congress and the White House are debating over what specific contractionary fiscal policy should be implemented in order to decrease the nation’s budget deficit as the last three years have seen yearly increases of over $1 trillion dollars to the national deficit. In summary, the macroeconomic policies learnt in class have been enacted in real life and I will be going over how expansionary fiscal and monetary policies have raised aggregate output and helped the economy out of the recession, while also discussing how...