Impact of the American Recovery and Reinvestment Act of 2009

Justin Snellings

After the Great Recession, which occurred from 2007 to 2009, the U.S. Government initiated the American Recovery and Reinvestment Act. The Act is an example of an expansionary fiscal policy which is a plan meant to expand money supply by encouraging economic growth. It typically increases employment rates and reduces inflation. The American Recovery and Reinvestment Act intended to generate economic growth again because of the recession. A recession is when there are multiple periods of increased unemployment and falling income. At that point in time, there were high unemployment rates, a massive amount of job losses, and a decrease in money supply. It was a dreadful era for the economy.

In the American Recovery and Reinvestment Act of 2009, the government attempted to encourage economic growth by cutting taxes, increasing domestic spending, putting more emphasis on unemployment and education benefits, and using other methods. Tax cuts allowed consumers to have greater income by reducing the amount of taxes paid and increasing the tax refunds. The U.S. Government focused on having leniency with unemployment benefits. There is usually increased social welfare funding which aids unemployed individuals. The Act also included education benefits to where families or students are financially assisted. In the process, they could find ways to pay higher education expenses especially for college. The government stressed on incentivizing homeowners for energy efficiency. The plan agreed to increase tax credit for householders who made energy effective improvements to their home. During the recession, multiple businesses experienced losses that were, in some cases, caused by tax payments. The Act increased the time period to up to five years ago for these businesses to receive tax refunds. It allowed money to flow smoothly through the business cycle expanding the supply inevitably. With making changes in an economy, there will obviously be an increased amount of government spending. In the long-term viewpoint, this can damage the economy rather than help. 

The policies typically increase government spending and lower taxes. Domestic spending will increase aggregate demand. Aggregate demand is the total demand for final goods and services in the economy at any price level. According to the aggregate demand curve, as prices decrease real gross domestic product (RGDP) will increase. RGDP is a measure based on inflation that displays the value of all goods and services produced in a specific year. The U.S. basically experienced what is known as the “Wealth Effect” in which prices increased as consumption decreased. This process decreases aggregate demand as the formula states below:

AD = C + I + G + NX

Consumption, investing, government expenditures, and net exports add up to equal aggregate demand. The policy lowers taxes which typically increase consumption allowing RGDP to increase as prices increase in the short run. According to the Short Run Aggregate Supply (SRAS) Curve, as prices increase, RGDP will increase. The Long Run Aggregate Supply (LRAS) Curve shows that as prices change, RGDP will remain constant or at least in a relevant range. Although the majority of the policies can be effective in the short-term point-of-view, it can lead to inflation if demand is too high in the long run.  The American Recovery and Reinvestment Act provided benefits and drawbacks but ultimately, helped end the Great Recession.

References

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

 Pettinger, Tejvan. "Impact of Expansionary Fiscal Policy." Economics Help. 25 July 2008. Web. 25 Apr. 2016.