Introduction:
The Global Financial Crisis (GFC) of 2007-2008 is a stark
example of the complexities of economic downturns and the multi-faceted
responses they necessitate. This activity focuses on the fiscal policy response
of the U.S. during the GFC. By delving into its intricacies, we aim to
understand the goals, implementation, and effectiveness of fiscal policy in
handling such crises.
Background:
The GFC had its roots in the U.S. housing market, with the
subprime mortgage bubble burst leading to significant financial distress. As
the crisis unraveled, its effects spiraled globally, affecting diverse
economies, shaking consumer and business confidence, and resulting in a deep
economic downturn. Here are some specifics:
- Unemployment:
By October 2009, the U.S. unemployment rate had spiked to 10%, a
significant jump from the 4.7% seen in November 2007.
- Business
Impact: Financial institutions bore the brunt initially, with iconic
entities like Lehman Brothers declaring bankruptcy. However, the
repercussions were widespread affecting sectors from manufacturing to
retail. The auto industry, for instance, faced existential threats with
companies like General Motors and Chrysler requiring government bailouts
to survive.
- Economic
Metrics: U.S. GDP contracted by 2.5% in 2009, a reflection of the
severity of the recession. This came after a stable growth period where
the GDP growth rate averaged around 2.8% between 2004-2007.
Responding to the crisis, the U.S. government rolled out a
series of fiscal interventions. The Emergency Economic Stabilization Act (EESA)
in 2008 aimed at shoring up the financial sector. Meanwhile, the American
Recovery and Reinvestment Act (ARRA) of 2009, worth $787 billion, targeted
broader economic stimuli, including tax breaks, infrastructure investments, and
state aids.
However, the aftermath presented a mixed bag of results.
While some policies, like the bailout of the auto industry, could be credited
with saving key sectors and jobs, the broader recovery was sluggish.
Persistently high unemployment and the rise in national debt due to expansive
fiscal measures became central topics of debate.
Questions:
- What
are the primary objectives fiscal policy aims to achieve?
- Differentiate
between expansionary and contractionary fiscal policy. Use diagrams to illicit.
- Utilizing
the information given, discuss how the fiscal measures during the GFC
impacted the components of aggregate demand in the U.S.
- Given
the statistics and results provided, evaluate the effectiveness of the
U.S.’s fiscal response to the GFC. When forming your evaluation, consider
both the immediate requirements of the crisis and the longer-term
implications.
Instructions:
- Utilize
the background information and your own knowledge to address the
questions.
- Where
necessary, diagrams should be employed to enhance explanations.
- Ensure
your evaluation in question 4 is comprehensive, factoring in the
multifaceted nature of fiscal policy.
Conclusion:
The GFC serves as a reminder of the profound challenges that
economic crises present. This activity offers insights into how fiscal policy,
one of the key tools in a government’s arsenal, was deployed in one of the most
trying economic periods of recent history. Through this lens, we hope to refine
our understanding of the capabilities and limitations of fiscal policy
interventions.