Government spending in the 2nd quarter increased by 11% and this spending affected the car industry and the housing market. Inventory also declined in this quarter and this reduced the GDP by 1.39%, however when aggregate demand increases the inventory level is also expected to increase. According to the congress budget office the 3rd and 4th quarter level of GDP is expected to improve due to increased government spending and a 1.6% growth rate is expected. However the recovery process is expected to take longer given that those consumers are faced with high unemployment rate, high debt levels and restricted borrowing. (Alan Rapperport (2009))
The article highlights the role of government in a recession, a recession is characterized by high unemployment rate, declining GDP level and reduced aggregate demand, from the article expansionary fiscal policy has been used to aid the economy out of the recession. However this has resulted into budget deficits which are expected to reach 11.6% of GDP this year.
Fiscal policies include government spending and taxation, in a recession an expansionary fiscal policies is used, this policy measure involves increased government spending that help increase aggregate demand. ...
above diagram as the level of government spending is increased then the aggregate demand curve shifts upward from aggregate demand 1 to aggregate demand 2, this results into an increase in the level of GDP from Y1 to Y2. From the US economy case the government has increased the level of spending in order to increase the level of employment and GDP. This is evident where the level of GDP in the 3rd and 4th quarter is expected to increase and the decline in new unemployment benefits claims and the reduction of in the unemployment benefit individuals. (Alan Rapperport (2009))
Increased government spending results into high inflationary pressure in the economy, as a result monetary policies that aim at reducing the inflationary pressure are used, these policies include increasing interest rates and increasing reserve ratios. From the article it is evident that the monetary policy rule used is restricted borrowing which aids in reducing the inflationary pressure. (Phillip Hardwick (2002))
The above analysis shows the role of fiscal policies in a recession, it analysis the policy measures that the US government has undertaken and their impacts. It is evident that the level of government spending has increased and this has resulted into increased budget deficit. This measure has helped reduce the level of unemployment in the economy and also has stimulated aggregate demand. The recovery process is expected to take longer given that consumers are faced with restricted borrowing, increased debts and high unemployment.
Alan Rapperport (2009) US GDP contracts by 1% in Second Quarter: published august 27th 2009
Phillip Hardwick (2002) Introduction to modern economics. Prentice Hall publishers: New Jersey.