Explain the role of fiscal policy during a recession. Give two examples and illustrate them with...

Explain the role of fiscal policy during a recession. Give two examples and illustrate them with graphs.

Expert Solution

Fiscal policy refers to the usage of tools majorly tax and government expenditure by the nation’s government. During recession, government either raises their expenditure or lowers the tax to boost the demand in the economy. Both the policies will lead to the rise in aggregate demand and therefore, helps in curing recession.

Example: If the nation is facing recession then government can increase their expenditure. By doing so the component of government expenditure in aggregate demand will rise. This will shift aggregate demand curve from AD to AD1 and therefore will increase output or GDP in the economy. This is shown by graph below:

Example: If the nation is facing recession then government can reduce taxes. By doing so, the consumers have more income in their hand to spend and therefore will increase their consumption demand. This increases the component called consumption of aggregate demand This will shift aggregate demand curve from AD to AD1 and therefore will increase output or GDP in the economy. This is shown by graph below:

Rahul Sunny answered 7 months ago

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