How to solve this for full points? FREDd - Real Govemment Consumption Expenditur

Question

How to solve this for full points? FREDd - Real Govemment Consumption Expenditures and Gross Investment 3,120 3,080 3.040 3,000 2.960 2.920 2,880 2,840 2,800 2010 2011 2012 2013 2014 2015 fred stlouisted.org myf.red/g/dvks Figure 2. Real U.S. Government Expenditures and Investment, in Billions of Dollans 8. In the above graph, we see a fall in government spending. Explain the effect this had on the recovery from the 2008-2009 financial crisis. (5 points) . In the above graph, what kind of fiscal policy is being pursued? (5 points)

Explanation / Answer

8. in 2008 the overall economy faced a great financial crisis that resulted in a lower number of potential GDP, higher unemployment etc. That time the economy could recover from this crisis by expansionary fiscal and monetary policy. A fall in government spending means contractionary fiscal policy. In 2009 there was the highest number of government spending than it starts to fall. right after the crisis, the economy starts to recover because of the high amount of government expenditure. But the economy faced difficulty to recover for the declining government spending.

In the above graph, the contractionary fiscal policy is pursued as the government spending is decreased and it denotes contractionary fiscal policy.

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