This paper discusses the current state of the US economy and outlines some of the problems that have caused the GDP to face a decline in recent times. The paper then goes on to explore what policies are being used to alleviate the problems of a slowdown and suggests plausible solutions to the US problems. The US economy, an engine for the world’s economies, is showing signs of a downturn in economic activity. The housing sector and as a result the sub-prime debt market has suffered in recent time. Global giants such as Citibank have written off losses worth $18 billion in terms of bad sub-prime debt. However, if these two sectors were the only ones facing a downturn matters could have been easily controllable. But other problems such as the rising energy prices and the subsequent increases in the costs of production, along with unemployment levels rising to 5% from 4.4% in March 2007, the US economy is in a crisis. There are three main problems with the US economy. These are the housing sector slump, the capital market issues, and the rising energy prices. The sub-prime market issues are the main factor belying the housing industry slump. Before discussing the housing industry it is important to clarify the role of the sub-prime markets. Sub-prime lenders loan out money to borrowers who are not very creditworthy and as a result of this, the lenders charge the borrowers a higher interest rate. Houses that cannot be sold on the primary market are sold in the sub-prime mortgages industry. Thus, due to over-building, the prices of houses fell and the houses could not be resold without significant price reductions. In 2007, due to the inability of many subprime borrowers to pay back these loans, many foreclosures took place. This led to a downturn in the housing market, which in turn has led to a slowdown in the construction industry. The capital market also has suffered as a result of the housing sector’s weaknesses. As banks suffered huge losses due to the sub-prime losses, credit became tighter and investors had little money to invest. Also as property prices went down, people did not have a property to secure their loans, and investments in the capital market lowered. Due to this credit crunch, interest rates rose further fueling the decline in investments. The effect of the capital market slowdown and the housing sector decline, coupled with rising energy prices has worsened the USA’s economic conditions even further. Rising energy prices have led to price hikes and increases in the costs of production which in turn has further curtailed aggregate demand in the economy leading to a situation, many economists think, that will give way to a recession. To counter the worsening situation the Fed and the congress have each introduces measures that might hold the economy from going into recession. Congress has introduced a two-pronged policy to curtail the onslaught of a recession. Congress has introduced a spending stimulus package worth $150 billion. Companies have been offered increased tax deductions if they invest in certain industries. This tax-cut incentive provided to companies is worth $50 billion. The rest of the $100 billion is to be distributed among people who earn less than $75,00 and to people wh