Fiscalpolicy is a tool used by the government to stabilize, stimulate, andparticipate in the government. Recession indicates the fall of GDPand a negative economic growth period. Aggregate demand is primarycause of recessions accompanied by other sources such as financialcrisis, high interest rates, and decrease of asset prices. Highinterest rates reduce investment and borrowing causing the demandside shock.
Toreduce the economy recession, some strategies should be imposed inthe economy. For instance, the interest rate should be reduced. Ifinterest rates are high, demand shock is low. People will have lessconfidence and fear unemployment and they start spending less(McEachern,2012).As a result, this will cause demand to fall hence, reducing economyrecession.
In2002, the federal budget turned from a surplus to expected deficit.In essence, the budget does not determine the economy, but theeconomic growth determines the budget. The budget preparationresulted to recession that was the key factor for dwindling of thebudget. The following are the factors that caused the federal budgetfrom surplus to expected deficit. Firstly, the Congressional BudgetOffice (CBO) predicted that the Gross Domestic Product (GDP) wouldrise by one percent in 2002. In 2001, the GDP was at 2.4 percenthence, they predicted it would rise to 3.4 percent. Surprisingly, theeconomy fell into recession early in the year. In 2001, the revenuewas $145 billion that was below the target, and at the same time, thespending was above the target $10 billion. As a result, the budgetsurplus for 2001 fell to $127 billion from $281 billion of theforecasted level. Therefore, the relationship between decliningsurpluses and current recession is the key factor for budget surplus.
Inthe next five years, the budget position is likely to change. Forinstance, the federal budget deficit is likely to occur due tooverspending. Corresponding, overspending will increase the rate ofinflation. The budget deficits would gradually increase due to theincreasing interest costs. The interest rate is bound to rise due toraise of government borrowing (McEachern,2012).Therefore, the GDP is likely to grow rapidly.
McEachern,W. A. (2012). ECON Macro 3 (3rd ed.). Mason, OH: South-Western.