Expansionary Policy: The American Recovery and Reinvestment Act of 2009

America and most of the other countries experienced a global shrinkage in their economies, which has become known as The Great Recession. This lasted from about 2007 to 2009 and is considered the biggest recession since The Great Depression of the 1930’s When talking about an economy “shrinking,” it means that RGDP and productivity is decreasing. GDP is determined by consumption, investment, government spending, and net exports. A decrease in any of these values and lowers GDP. As GDP continues to lower people begin to react and stop spending their own money making it shrink at a faster rate. Governments enact expansionary policies in order to slow down and hopefully reverse the loss of GDP. To help slow down and reverse the recession the American Recovery and Reinvestment Act of 2009 was passed. This contained expansionary policy in order to help household and businesses recover from the past two years. Similar to the Great Deal of the 1930s its intent was to help create jobs for people who had lost them and give support services and programs to those struggling.

                 The policies enacted in order to help individuals were a lot of chances to get taxes breaks or exemptions. These included additional child tax credit, educational benefits, Home energy efficiency and renewable energy incentives, Homebuyer Credit, Money Back for New Vehicles, and an increase in unemployment benefits. The recession cause individuals to spend less of their own money and save it in case the recession continues for longer. The policies for businesses were similar to the household policies. There was work opportunity tax credit, Energy Efficiency and Renewable Energy Incentives, and Net Operating Loss Carryback. These helped smaller businesses that lost a lot of productivity during the recession and could help them gain it back by getting refunds from up to five years ago.

This reduction in consumption will result in lower aggregate demand, leading to lower prices for goods, lower productivity, and a higher unemployment rate in the short term. All of these were seen as outcomes of the Great Recession. The expansionary policy of adding tax breaks for households gave more money back to households therefore increasing consumption and aggregate demand in the long run. This relationship between consumption and prices is known as the wealth effect, because when people have more money they feel wealthier and are more willing to buy things.

These policies have done their job in the short term. It was estimated that the American Recovery and Reinvestment Act of 2009 cost around $830 billion which was another setback for GDP initially, but since then the United States Economy has been able to recover to a point where it almost the same as before the Great Recession. The recovery of such a large economy also helped the rest of the world’s economies to regain productivity. With the short run lower in aggregate demand the expansionary policies of the ARRA was able to return aggregate demand to its former level, therefor returning productivity to its “natural” state.

The American Recovery and Reinvestment Act of 2009: Information Center. 2016. IRS.

Obtained from https://www.irs.gov/uac/The-American-Recovery-and-Reinvestment-Act-of-2009:-Information-Center