Monetary and Fiscal Policy: Government Reactions During a Massive Recession - Term Paper Example

At present, most of the economies throughout the world are going through a critical phase of recession and among all the economies. The situation has been so critical that the most power economies in the world also have not been able to escape this economic crisis. Economies of U.S., Japan, China, U.K. etc are all suffering from severe demand crunch and consequently fall in production and employment. U.S. is the Worst hit country by the current recession. The ongoing economic crisis through out the whole world owes it origin in U.S. following a huge credit crisis in the home loan market.

The effect of recession is being largely felt in most of the major and supposedly strong economies in the world. The economies of U.S., Japan, and a number of European countries are suffering the most. Most of the economic sectors are facing excessive domestic as well as international demand crunch. There has been huge fall in domestic demand as well as in exports. Under this recessionary situation, the level of employment has decreased to a large extent all over the world. The fall in employment has easily been translated into a fall in real income thereby causing fall in demand for consumption goods. In U.S.

A around 1,57,000 job were lost in 2008. (Longley, p.1) Since 2008, all the recession hit countries have been adopting several measures to fight this situation. The efforts made by the U.S. government are the most significant one. U.S. government is playing a very active role in overcoming this recession. Various stimulus packages have been designed to provide a boost to the economy. In 2008, U.S. government had passed the Economic Stimulus Act whose main focus was on providing huge tax rebates to the taxpayers.

Even the very recent economic stimulus package provided by the Osama’s Government has placed its major emphasis on tax cut. A huge sum of money is being spent to allow significant tax cut. (“Obama: Tax cuts will be felt by April 1”, p. 1) Economic Stimulus Act of 2008 in U.S. created huge tax rebates by law. During 2008, most of the individual taxpayers having the income below the limit set by the government received a rebate of at least $300 (approximate) per person, while the married couples received a rebate of approximately $600.

The taxpayers who were eligible for getting tax rebates additionally obtained around $300 per children under the age of 17 along with the individual tax rebates. The payment was set in such a way that it was equal to the taxpayer’s net income tax liability. But point to be noted here is that in no occasion tax rebates exceed 4600 for a single person. Another interesting thing regarding this stimulus act was that people having no tax liability also became eligible for getting the rebates. However, for the persons, whose earnings were greater than 75000, tax rebates were phased out.

(Broda and Parker, 2-8) As far as the present economic stimulus package is concerned, it can be found the in the case also prime focus has been put on tax related issues. Of the $787 billion total stimulus package, which has been designed to provide some life into the waning economy of U.S., 40 percent has been reserved to spending in tax cut. This tax cut is applicable to individuals as well as businesses. The tax cut which has been reported is bigger than what was expected, and it now being expected by the policy makers that this huge tax exemption could provide a great support to the ailing economy.

The package includes tax cuts of around $500 to $1000 for