S Recession Responce In the last lecture I present various w

S. Recession Responce In the last lecture I present various ways that the Federal government and the Fed have been trying to alleviate the effects of the great recession. However, I omitted mentioning two additional items. First, individual states have been significantly reducing the number of state government workers. Second, the Dodd-Frank banking regulations that were passed in the aftermath of the banking problems increase the required amounts of bank reserves (also a provision of the Basel III accord that governs international banking). What effects will these two additional items have on the U.S. economy? Required-s points possible.) 8000 characters remaining) Continue without saving

Solution

a) effect of state government reducing the level of people employed in state agencies.

To evaluate the effect of this action by the government we have to see two different aspects. First, people working with the government have lost their jobs and hence the ability to create the demand in the economy (cause they don\'t earn wages anymore, so they will demand less) and there is an increase in the unemployment in the economy because of this layoff. Second, we have to look where the government is spending those salary which they saved from laying off workers.

If the amount is spent on other objectives like infrastructure, creating a better opportunity for others to start their own business activity, cutting taxes or social security programs we are better off than before and this action will help in reducing the adverse effect of the recession. If this amount saved on salary is used to run the everyday functions of government then this will only make the situation worst.

b) Effect of increased required amount of bank reserves.

In the short run, this action by the government will have a very detrimental effect on the economy. On one hand, the government is trying to increase the money supply in the economy by using quantitative easing and near-zero interest rates, on the other hand, a legislation to increase the bank reserve will reverse those gains achieved by QE. In the long run, it will prevent another great recession.