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Economic Slowdown Essay

4169 words - 17 pages

A package of economic measures put together by the government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending. The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that the impact of a recession can be lessened with increased government spending.

The global recession of 2008-2009 led to unprecedented stimulus packages being unveiled by governments around the world. In the United States, the $787-billion stimulus package dubbed the American ...view middle of the document...

 Ben Bernanke argued, instead, that the problem was lack of credit, not lack of money, and hence, during the financial crisis, Fed lead by Bernanke provided additional credit, not additional liquidity (money), to stimulate the economy back on trail. Jeff Hummel hasanalyzed the different implications of these two conflicting explanations. President of the Federal Reserve Bank of Richmond, Jeffrey Lacker, with Renee Haltom, has criticized Bernanke's solution for that "it encourages excessive risk-taking and contributes to financial instability." [2]
It is often argued fiscal stimulus typically increases inflation and hence must be counteracted by a typical central bank. Hence only monetary stimulus could work. Counter-arguments say that if the production gap is high enough, the risk of inflation is low, or that in depressions the inflation is too low but the central banks are not able to achieve the required inflation rate without fiscal stimulus by the government.
Monetary stimulus is often considered more neutral: decreasing interested rates make additional investments profitable, but yet only the most additional investments, whereas fiscal stimulus where the government decides the investments may lead to populism or corruption. On the other hand, the government can also take theexternalities into account, such as how new roads or railways benefit users that do not pay for them, and choose investments that are even more beneficial although not profitable.

Definition of monetary easing
Action by a central bank to reduce interest rates and boost money supply as a means to stimulate economic activity.

Definition - What does Monetary Easing mean?
Monetary easing is a type of currency intervention where a nations central bank either keeps interest rates artificially low or expands the money supply by making open market purchases of its own sovereign debt.
ForexDictionary explains Monetary Easing
Monetary easing is meant to spur a nations economy into growth mode by making capital readily available. However, monetary easing can also become a catalyst for inflation. When a nation floods its system with easy credit (via low interest rates) or floods the market with currency, it is hoping that the economy will expand. If the economy expands and monetary policy tightened up again, then the temporary inflation risk was worthwhile from an economy standpoint. If, however, the monetary easing fails, the inflation that follows may leave the nation worse off than if no action had been taken at all.

An open economy is an economy in which there are economic activities between domestic community and outside, e.g.people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. Trade can be in the form of managerial exchange, technology transfers, all kinds of goods and services. Although,...

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