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The Multiplier Effect

Module 3

3-1 Discussion: The Multiplier Effect 

The Multiplier Effect

Throughout the decade 2000-2010, there were multiple tragic events that had happened. The United States economy had to work hard to rebuild its economy. This period was jam packed with economic ups and downs. A major change in independently spending was during the great recession. This recession had begun in December of 2007 and lasted almost two years, ending in June of 2009. It was the longest recession since WWII. The biggest effect of this recession was that the house prices had decreased by an average of 30 percent. A major cost of this recession was the real GDP had decreased by 4.3 Percent (the largest decline in the postwar era (based on data from October of 2013)). Additionally, before the recession the unemployment rate was 5 percent in 2007 which later rose to 9.5 percent by June of 2009 and peaked at 10 percent only a few short months later in October of 2009.

As the recession grew worse and worse, the entire globe took extreme measures to help reverse this recession. There were two fiscal stimulus programs that the US and many other countries ratified which “used different combinations of government spending and tax cuts.” The two programs are called the Economic Stimulus Act (2008) and the American Recovery and Reinvestment Act (2009).

As the federal reserve evolved its responses to crisis, they started taking non traditional avenues. “The Act provides tax rebates for low- and middle-income US taxpayers, and tax incentives to stimulate business investment (Richter and Reiss, PC).” The economic stimulus act was created to boost the economy and get the US out of the recession. The ARRA on the other hand, was created to revolutionize the structure of the economy, tax relief, improve health care facilities, and increase educational opportunities.

When you put these fiscal measures together with others, it makes a multiplier effect for multiple upcoming years following the Great Recession. It altered the economy of the United States of America in a very short time because when you combine the two fiscal measures, it has lasting effects on the economy and this accelerates its growth. In this way, through the multiplier effect and measures taken by government final income rises due to new input that has been inserted in the form of combination of fiscal policies. Nevertheless, the magnitude of multiplier is subject to the decision to spend.

Reference

https://www.clemonslaw.com/news/economic_stimulus_act_2008.pdf

Rich R (2013). The Great Recession.

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