Question

Argue that we are headed for a recession, look at the fall in AS and focus on unemployment, GDP. Then follow with a fiscal policy recommendation(what the government should do with taxes , government spending and the deficit and Monetary policy recommendation( what the fed should do with the money supply and interest rates and why.

Answer 1

During the start of a recession, the aggregate supply increases whereas the demand fall and there is piling up of inventory investment. As a result, the workers are told to leave the job and unemployment starts to set in. Also, due to decreased production of goods, the output starts to fall and hence the GDP.

FISCAL RECOMMENDATION:

The government should perform the following:

1) Taxes: The government should cut down taxes so that the price of the goods decreases and the demand for the goods increases so that inventory stock decreases and the recession is kept under control.

2) Government Spending: The government spending should be increased to provide the citizens with enough opportunities to earn their living and in this way, the unemployment condition is kept under check. This will lead to a decrease in recession.

MONETARY RECOMMENDATIONS:

1) Money Supply and interest rate: The money supply should be increased so that there is more money available in the market and the demand can be increased and recession can be checked. On the other hand, the interest rate should be decreased so that the investment demand can be increased with more private investment and in this way, unemployment can be decreased and demand can be increased. This will help in keeping a check on the recession.