Question

4.4 According to a news article written in December 2008, the severe recession in the United States began in December 2007, but many policy-makers and economists did not recognise that the country was in a recession until September 2008 (Norris, 2008).4 Does the idea that few economists believed the economy was in a recession until nine months after the recession began tell us anything about the difficulty governments may face in implementing a fiscal policy that stabilises rather than destabilises the economy?

Answer 1

Ans. In the academic sense , it is believed that an economy is in recession only when it's GDP diminishes for two consecutive quarters and this only happened in 2008 because of which it was declared then only. Now , several economists observed in 2006 and 2007 only that the economy was heading towards a major recession and corrective actions need to be taken to prevent this but many believed that this would not effect much. Now , government certainly faced a problem because they haven't believed the problem to become so big until the firms which were " Too Big to Fail " got bankrupt. Yes , this certainly tells us that implementing a fiscal policy in different time would lead to more instability rather than stabilizing the economy because then the motive of the fiscal policy would be different than what the economy is facing. This would eventually lead to instability.

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