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A Look Into the Monetary Policies During the Great Recession and the Great Depression - Part 13

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5.6 Economic Impact of the Monetary and Fiscal Stimulus

To measure the economic impact of the monetary and fiscal policy, four scenarios have been analyzed by (Blinder and Zandi, 2010).

These four scenarios are:

  • A baseline evaluation that includes all the policies.
  • A hypothetical situation that includes the fiscal stimulus, but not the financial policies.
  • A hypothetical situation that includes the financial policies, but not the fiscal ones.
  • A scenario that does not include any policy.

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The results showed that in the baseline scenario, the economy has begun its recovery, but has not progressed much. It has remained intact because the fiscal and financial policies that brought the economy out of the recession is winding down. As a result, the effects of these policies are fading out. Furthermore, the Euro crisis also impacted the US economy to some extent. Due to these factors, the recovery of the US economy did not take off, like the previous recessions. In 2009, the real GDP fell by 2.4 percent, and this expanded by 2.9 percent in 2010 due to the mix of policies undertaken by both the US government and the Fed. During 2011, the real GDP increased by 3.6 percent while in 2012, the real GDP increased by 2.8 percent. In 2013, the real GDP increased by 2.33 percent with the third quarter along registering a growth of 4.1 percent. During the first half of 2014, the economy grew by 1 percent (Statista.com, 2014). The real GDP of the country was taken as a measure because it compensates for value in the US dollar caused by inflation or deflation, and this makes the real GDP a better measure to compare the GDP of a country over an extended period of time. The chart below shows the real GDP from 2009 to 2014.

Besides the real GDP, another measure is the unemployment rate. The monthly growth job rate in 2010 averaged to 100,000 while these rates were above 200,000 for 2011. The unemployment rate fell to around eight percent in 2012, and to seven percent in 2013. In 2014, the rates dropped further to 6.1 percent.  These statistics show that the measures taken by the Fed have helped to improve the economy during the last three years, after the recession ended.

In the fourth scenario, when none of the measures were implemented, the real GDP fell to a rate of 7.4 percent in 2009, and an additional 3.7 percent in 2010. In this scenario, the fall from peak to trough was roughly 12 percent, while the unemployment rate peaks at 16.5 percent. The entire economy looks bleak in this scenario, and had much resemblance to the Great Depression. The state of the economy analyzed in the fourth scenario goes to show the policies implemented by the US government helped to change the economy around. By 2011, the real GDP is 15 percent higher while the unemployment rate is six and a half points lower because of the policies implemented by the government and the Fed

To know the role played by the financial and fiscal measures, it is important to understand how the economy would have looked like in the second and third scenarios. The analysis showed that had the government used only the fiscal stimulus with no financial measures, then the recession would have taken one additional year to wind down. On the other hand,  if there was no fiscal stimulus, then the recession would have ended in the last quarter of 2009, and would have expanded much slower in 2010. Moreover, the unemployment rate would have hit 12 percent. (Blinder and Zandi, 2010).

From the above study, it is evident that both the financial and fiscal stimulus packages helped the economy to come out of recession. While it can be argued that TARP and ARRA are not a universal success, it has nevertheless played an important role in stabilizing the economy, and to put it in the path of growth after the deep recession.

The monetary policies undertaken by the Fed were clearly different during the Great Depression and the Great Recession. In the former downturn, many mistakes were made, and this caused catastrophic problems for the economy during the 1930s. On the contrary, measures taken by the Fed during the Great Recession helped to stabilize the economy, and put it in a better shape than before. The impacts of these policies were also different in both the economic downturns. To get a deeper understanding of the differences between the Great Recession and the Great Depression, the next section compares the two events on the nature of the policies and its resultant impact on the different facets of the economy.

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