The American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act passed in 2009 was known as a stimulus package and a response to the Great Recession. Congress and the president intended this bill to create jobs and provide relief programs for those who were struggling because of the recession. One way the government intervened was by giving tax credits to individuals who fell below a certain socioeconomic level such as: Earned Income Tax Credit, Making Work Pay Tax Credit and Health Coverage Tax Credit. The act also provides tax credits for businesses such as the Work Opportunity Tax Credit; this credit provided an incentive for businesses to hire veterans as well as at risk youth in order to receive the tax break. By providing individuals and businesses with tax credits the government is allowing them to keep more money in their pockets. The government does this with the hopes that people will once again start to feel secure enough to start spending their money again; this allows for money from households to start circulating in the economy and hence allows the economy to grow again.

The model most often used by economists to explain short-run fluctuations in economic activity around the long run trend is the model of aggregate demand and supply. This model allows economists to analyze fluctuations in the economy as a whole. The aggregate demand curve shows the quantity of goods and services that consumers want to buy depending on the price level. There are multiple reasons why the aggregate demand curve might shift; for example, during the Great Recession households are likely to become more concerned about saving their money for retirement if they are not making as much. In order to save households must decrease consumption causing the aggregate demand to decrease (on a graph it would shift to the left). This is where we see the tax credits come into effect from the American Recovery and Reinvestment Act, any policy that changes how much people want to consume will put an upward pressure on our aggregate demand curve and the tax credits accomplish this by keeping more money in consumer’s pockets. The second part of the model of aggregate demand and supply is the aggregate supply curve; in the long run the aggregate supply curve is a vertical line (LRAS) while in the short run it is upward sloping (SRAS). Policies that increase real GDP increase the quantity of goods and services supplied which means a shift to the right, or increase, in the long run aggregate supply curve. When the government intervenes and implements policy that increases real GDP the quantity of goods and services supplied increases and shifts the long run aggregate supply curve to the right; increasing the curve. When policy lowers the quantity of goods and services supplied the aggregate supply curve decreases by shifting to the left. When it comes to the short run aggregate supply curve there are several items that may cause a shift in the curve. If there is a decrease in the quantity of available labor the aggregate supply curve shifts to the left; during the Great Recession it is certainly possible the amount of labor available decreased due to layoffs.