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Fiscal Policy

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During the 2007-2009 financial crises, the US government undertook strict fiscal policy to stabilize the economy. In an effort to stimulate the economy, the federal government applied stimulus packages in order to revive investment and public spending. Stimulus packages are economic measures that the government undertook to promote economic growth. Through the stimulus package, the government promotes spending while it reduces unemployment (Bade& Michael, 2001). The fiscal policies or stimulus packages can therefore be viewed as radical measures that the government undertakes to prevent an economic crisis (Bade& Michael, 2001). Following the 208-2009 global economic recession, the US government responded through an exceptional stimulus package that included $787-billion financial boost. The package was meant to double America’s recovery rate through increased investments and job creation. The reinvestment act 2009 contained a wide array of spending projects and tax breaks. The Reinvestment Act of 2009 was meant to promote job creation and revive the US economy. If the federal government failed to unveil the above stimulus packages, the recession would have prolonged. Consequently, the recession would have had critical impacts on the US economy.

If left alone, the economy would have corrected itself. Indeed, an economy has a tendency to stabilize itself as hypothesized by classical economic theories. Under the classical school of thoughts, economist believes that an economy is capable of correcting itself from a state of imperfection (Bergsten, 2011). In the US’s case, stabilization of prices would have initiated the self-correcting mechanism. This would have had a ripple effect on consumption and investments that would correct unemployment.

The fiscal policies, national debt, and budget deficit are dependent. Following the government’s response towards the 2007-2009 economic crises, the national debt and budget deficit increased. In order to finance the stimulus packages, the government borrows from both internal and external sources (Hirshleifer, Glazer & Hirshleifer, 2005). This increased the national debt as well as the budget deficit. Between 2007 and 2011, the federal budget deficit grew from $160.7 billion to $1,299.6 billion, and the national debt grew from $8.9 trillion to $14.8 trillion. Consequently, the ratio of national debt to GDP remained at 10:1. The national debt indicates three basic variables that determine a country’s economy. In particular, the national debt measures prevailing economic conditions in terms of government policies and demographic trends (Bonner & Wiggin, 2006). Since the Great Recession, the United States has been operating on a deficit. This indicates that annual government’s spending exceeds the amount that is collected by the treasury. On the other hand, budget deficit refers to the extra amount required by the government to finance its activities besides the usual budget.  

The future of the US’s economy depends on the current government’s spending trends. Thus, the national debt and budget deficits would have significant impacts on the country’s economy. Ideally, national debt and budget deficit indicates that the country spending surpasses its gross domestic product (GDP). Indeed, the government’s spending should not exceed the country’s GDP. The situation presented above indicates that the country is prevailing through debts. In future, the country is likely to experience extreme inflation rates. This is likely to lower investor’s confidence leading thus reducing investment. The country is likely to slide back into a recession due of reduced job creation and spending cuts. Thus, US citizens will have to cope with high interest rates and high mortgage rates due to the country’s account deficit.

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