Summary of fiscal policy reactions to 2008 financial crisis—

2. Summary of fiscal policy reactions to 2008 financial crisis— -- Economic Stabilization Act of 2008 (Troubled Asset Relief Program—TARP) -- Allowed U.S. Treasury to buy up to $700 billion of troubled assets. --American Recovery and Reinvestment Act of 2009 (Feb 2009) --$787 billion to stimulate the economy (tax relief, spending and infrastructure) Government raises funds in 3 ways— --Levies taxes --Borrows --Prints money for its own use Objectives of fiscal policies Economic growth requires goods and services output to increase More rapidly than population

3. Goal for employment—Less than 5.5% unemployment rate Price stability—avoid excess inflation and deflation Inflation—price increases without increase in quality of goods or services. Discourages investment due to uncertainty of future returns Balance in international trade --Goal to import about what you export --U.S. imports more than it exports resulting in foreign investment in the U.S. Fiscal policy—the relationship of the Treasury’s tax plan to its expenditure plans to influence the economy of the nation President formulates budgeting and fiscal policy. Congress must pass legislation to implement Treasury—manages money for government, must consider impact on banking system --Borrows money as needed to fund government operations --Collects taxes

4. Impact of economic downturn—tax receipts go down Automatic stabilizers in economy --Unemployment insurance program (transfer payments) --Welfare payments (transfer payments) --Pay-as-you-go progressive income tax system Transfer payments—payments for which no current productive service is rendered Impact of tax rates— --Raise to cool down the economy --Lower to stimulate the economy Impact of government spending --Stimulates economy primarily in area where money is spent (overall effect of tax cuts more broad-based and quicker) Tax policy impact— --May affect savings, thus funds available for investment --Corporate rate, affects dividends, investments Political issues of monetary policy