Great Depression: Government Policies

Prior to the Great Depression, government policies related to economics were based on a policy called laissez-faire (“What Is Fiscal Policy?”). This French theory idealizes a smaller government role, arguing that the country would function more efficiently without government surveillance ("Laissez Faire Definition | Investopedia"). Popular in the 18th century around the globe, colonists opposed monarchical government and British rule, employing instead ideas of small government (“What Is Fiscal Policy?”). Although this policy was originally preferred by the colonists, it became an unreliable policy in regards to the changing economy. After numerous problems following The Great Depression and World War II, it was decided that the role of …show more content…
In recessionary periods, the economy is producing less than potential output, or a shift left in aggregate demand. In order to stimulate the economy, common solutions are increased government spending and reducing taxes, or a combination of both. Cutting taxes, a conservative ideal, allows consumers to keep more of their income, leading to an increase in disposable income (Hubbard, R. Glenn, 899). If consumers have higher disposable incomes, they will spend more, allowing businesses to bring in higher profits, therefore increasing the GDP and balancing the economy. Similarly, the act of increasing government spending, a liberal ideal, has a direct impact on increasing the GDP and regulating the economy because GDP is the sum of consumer and government spending, investment spending and net exports (Hubbard, R. Glenn, 899). Although both methods are effective, a consequence is that the government must run a deficit. Expansionary policy can be accomplished through increased government spending, reduced taxes, or a combination of both, regulating the economy through variations in consumer income and …show more content…
Referred to as contractionary policy, this course of action is designed to decrease the aggregate demand to a sustainable level when an economy is working outside of its production possibility curve. In order to decrease the additional money in the economy, the government turns to contractionary fiscal policy. As a result, common solutions involve decreasing government spending, increasing taxes, or a combination of both. By increasing taxes, a liberal ideal, the government will slow economic growth, leaving consumers with less disposable income, and as a result, reducing the aggregate demand curve (Hubbard, R. Glenn, 899). In the same way, cutting government spending, a conservative ideal, will directly decrease the GDP and decrease aggregate demand (Hubbard, R. Glenn, 899). In either circumstance, the government will run a surplus because it would be taking in more than it would be spending. Contractionary policy is a policy designed to prevent the economy from exponential growth through the implications of decreasing government spending or increasing taxes, directly corresponding with the direction of the