what fiscal policies should our government implement to deal with this pending crisis?course hero

Did policymakers expect the financial crisis to happen?

Most people, including policymakers, did not anticipate the depth, breadth, and severity of the financial meltdown and economic downturn. We have had to remain very flexible and open to policy actions that had no precedent.

What makes fiscal policy stabilizing?

It is because they operate in real time, without decision or implementation lags, that they are a very effective way to make fiscal policy stabilizing. Yet fiscal actions often end up undermining automatic stabilizers. A widespread tendency to spend the revenue windfalls during good times is the main culprit.

How has the government intervened in the financial crisis?

Another way that the government has intervened to limit the spillovers of financial problems to the real economy, and vice versa, is by taking steps to reduce unnecessary foreclosures.

How did the Federal Reserve respond to the financial crisis?

From the onset of the crisis in the summer of 2007, we could see that widening spreads in interbank funding markets were putting upward pressure on the interest rates paid and charged by banks. To combat the strains in these markets, the Federal Reserve provided credit to banks on more generous terms and at longer maturities than usual.

What should be the solution to the fiscal cliff?

A solution to the fiscal cliff should include changes to Social Security. Demands that Social Security should be taken off the table, such as those made by Senator Dick Durbin (D-IL) [1] and several others, are both misguided and wrong.

What is the Heritage Foundation's plan?

[6] . The Heritage plan makes Social Security an insurance program that would protect every American against retirement poverty.

Why use the Social Security index instead of the current outdated index?

Using this index instead of the current outdated index would better reflect the actual increases in inflation that affect seniors. It would result in real savings to Social Security, especially over time, while still protecting the value of seniors' monthly benefits from being eroded by inflation.

What are the changes to Social Security?

There are three simple changes, two of which have wide bipartisan support, that should be included in any settlement. 1. Fix the Annual Inflation Adjustment. Social Security's annual cost-of-living adjustment (COLA) protects retirees against inflation reducing the purchasing power of their monthly benefits.

Why change Social Security benefits?

One of Social Security's original purposes was to protect seniors from poverty and economic hardship. Changing benefit structure would be a step toward returning to that goal.

How does the IMF help countries?

IMF capacity development can help countries to strengthen their administrative emergency response capacities in public financial management and revenue administration. To support governments requiring financial assistance, several facilities are available from the IMF and the global community, as highlighted by the IMFC.

What is the role of government?

A key role of government is to protect the well-being of its people—most crucially and visibly during emergencies such as the recent outbreak of the coronavirus. The IMF has $50 billion available in rapid-disbursing emergency financing to help countries suffering from the virus.

How to prevent, detect, control, treat, and contain the virus?

1. Spend money to prevent, detect, control, treat, and contain the virus, and to provide basic services to people that have to be quarantined and to the businesses affected. For example, national governments can allocate money for local governments to spend in these areas or mobilize clinics and medical personnel to affected places, ...

What is the Federal Emergency Management Agency?

For example, in the United States, the Federal Emergency Management Agency coordinates the continuity of operations and activities in the federal government. Some of these measures can occur through administrative means and others would require an emergency budget, which would also take stock of the overall fiscal cost.

Why is health spending important?

The priority for governments and the global community is to prevent people from contracting the disease and to cure those who do. More health spending can save lives both at home and globally.

Should governments protect people from the economic impact of this global health crisis?

Those who are hit the hardest should not go bankrupt and lose their livelihood through no fault of their own.

Do low income countries need grants?

The health spending must occur regardless of how much room in the budget a country may have. Low-income countries urgently need grants or zero-interest loans to finance the health spending they might not otherwise be able to afford.

Why do governments need to use fiscal policies?

The message is loud and clear: governments can use fiscal policy to smooth fluctuations in economic activity , and this can lead to higher medium-term growth. This essentially means governments need to save in good times so that they can use the budget to stabilize output in bad times. In advanced economies, making fiscal policies more stabilizing ...

Why are fiscal actions so effective?

It is because they operate in real time, without decision or implementation lags, that they are a very effective way to make fiscal policy stabilizing. Yet fiscal actions often end up undermining automatic stabilizers. A widespread tendency to spend the revenue windfalls during good times is the main culprit.

How can policymakers raise demand?

Policymakers can also raise demand directly by deliberately spending more. Either way, higher deficit (or a lower surplus) effectively cushions the blow on output. The response of the government budget balance to economic activity is clearly the key to understanding the contribution of fiscal policy to output stability.

What happens to the economy when output suddenly contracts?

For instance, if output suddenly contracts, policymakers can let tax revenues fall along with income (or even deliberately cut tax rates) and let unemployment benefits increase with the number of unemployed. This maintains income and purchasing power for individuals, and supports demand.

Is fiscal stabilization a sizable coefficient?

Chart 1 shows that these so-called “fiscal stabilization coefficients” can be quite sizable, especially in advanced economies. However, in emerging markets and developing economies fiscal stabilization is generally more modest and less frequent, though there are some that have large coefficients.

Does fiscal stabilization affect growth?

The analysis in the Fiscal Monitor also suggests that a more stable macroeconomic environment created by fiscal stabilization has positive effects on medium-term growth. One plausible explanation is that less uncertainty tends to encourage investment in all its forms (physical, human, and social).

What are the characteristics of a crisis?

A defining characteristic of the crisis has been a deepening adverse feedback loop in which financial strains have caused economic weakness, which has in turn led to credit losses and heightened financial strains, which then contribute to further economic weakness, and so on.

What did the weak economy do to the economy?

The weaker economy in turn contributed to further deterioration in asset quality and concerns about greater losses to come. As a result, banks and other lenders tightened their lending stance further, which put additional downward pressure on spending.

Why was leverage excessive during the financial boom?

As financial firms moved to reduce their exposures, they became less willing to make markets, and the liquidity of many securities declined.

What is the Making Home Affordable program?

Most notably, the Treasury recently announced the Making Home Affordable program that will provide financial incentives to encourage lenders and servicers to refinance existing mortgages with new mortgages having lower payments, thereby helping at-risk homeowners to avoid foreclosure.

Why is limiting foreclosures important?

Thus, in addition to helping homeowners stay in their houses, limiting foreclosures should benefit lenders, mitigate adverse impacts on affected communities, and, by limiting the decline in overall home prices, help support the macroeconomy. Fiscal Policy.

Why are buyers for these assets scarce?

In part, buyers for these assets are scarce because credit is expensive and difficult to obtain and because investors are highly averse to risk. Under the new program, the Treasury, with the participation of the FDIC and the Federal Reserve, is establishing public-private investment funds to purchase legacy assets.