(Doc) The Great Recession in UK

Running head: ECONOMIC FOUNDATION FOR PUBLIC POLICY
Economic Foundation for Public Policy
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1ECONOMIC FOUNDATION FOR PUBLIC POLICY
a.
The paper considers expansionary fiscal policy taken by the UK government in 2009.
During this period, the country experienced great recession. The chief purpose of this policy
was to influence economic growth of the UK during recession. This further helped the
government to keep inflation rate below 2 percent (Degryse, Matthews and Zhao 2018). The
other important focus of this policy was to stabilise economic growth for overcoming the
boom phase of the economic cycle.
b.
Expansionary fiscal policy of the UK government considers tax reduction, increasing
expenditure of government and a budget deficit by large extend. Through adopting this
policy, the UK government intended to increase aggregate demand within the economy
during great depression. For doing this, the government increased government expenditure
and decreased value added tax (VAT). Tax reduction in turn influenced consumers to
increase demand, as they have more disposable income. However, lower tax rate increased
government borrowing in 2009. This happened because the government earned lower tax
revenue at that time. This significant amount of public borrowing influenced UK economy to
experience a stimulus within the depressed economy. However, the political condition of this
country experienced many disturbances during that period.
c.
Economic Output: According to Keynesian model, expansionary fiscal policy leads total
output of an economy to increase further. This happens, as the aggregate demand of the UK
increases keeping aggregate supply level as constant.
General Price level: Due to this policy, aggregate price level will also increase. During
recession, aggregate demand (AD) equates with aggregate supply (AS) below long-term

2ECONOMIC FOUNDATION FOR PUBLIC POLICY
aggregate supply curve. The entire situation can be described with the help of following
figure:
Figure 1: Expansionary fiscal policy
Source: (created by author)
According to above figure, real national income of the country has increased from Y1
to Y2 while aggregate price level has increased from P1 to P2.
Unemployment rates: Expansionary fiscal policy helps an economy to reduce
unemployment. Through increasing aggregate demand, the economy can create employment
opportunity.