Question

Expansionary fiscal policy relies on changes in tax collections and government spending to achieve a non inflationary level of employment. Given this definition, what actions and projected consequences did President Obama enact to realize this goal? Include in your discussion economic conditions that existed prior to the 2008 election, i.e. the mortgage/real estate crisis, employment & unemployment, provisions President Obama used to offset the economic conditions, projected benefits vs projected detriments to the economy.

Answer 1

Answer:

Orthodox economic theory recommeds the use of countercyclical economic policy, this means:  

• when the economy is in expansion, the government should use contractionary fiscal policy (higher taxes and spending cuts) to keep the economy from overheating

• when the economy is in recession, as it was in 2008, the government should implement expansionary fiscal policy (lower taxes and spending increases) to aid economic recovery.

President Obama followed the theory and used expansionary fiscal policy to help the economy recover in 2008 and 2009. Expansionary fiscal policty basically consists in either tax cuts, or defitic-financed spending, or both.

Obama mostly used the latter to help people in need of welfare benefits due to unemployment, and to finance economic projects that could employ people.

While the deficit is something to worry about, the United States is a strong country, with a desirable currency: this means that the American government is unlikely to default on its debts, and investors are quick to lend money to it at low interest rates.

The projected benefits of the expansionary fiscal policy where obvious: more economic growth, which means less unemployment.

President Obama was also aided by the Federal Reserve, which implemented expansionary monetary policy (essentially increasing the amount of money that circulates in the economy).