Question

In the past 50 years, each recession has been met with either expansionary fiscal or monetary policy – or both. Using the models from class, explain what policymakers hoped to achieve. AND, again using charts, explain what would have happened had they not interceded. provide detailed answer

Answer 1

Recession is a business condition in which economy experiences very low level of economic growth, sometimes negative economic growth due to low level of aggregate demand. To boost the aggregate demand, the government or central bank of the country uses its expansionary fiscal or monetary policies respectively. These both expansionary policies increases the aggregate demand in the economy and thus the output increases and recession can be eliminated. In the upper part of the diagram, we can see that when government uses expansionary fiscal policy, the IS curve shifts rightward and interest rate increases and output also increases. In the second diagram in upper side, when central bank uses expansionary monetary policy, the LM curve shifts rightward and interest rate falls and outpur rises. These expansionary policies are useful to boost the aggregate demand in the economy so that recession can be eliminated. An expansionary fiscal policy includes an increased government expenditure or low taxes or a combbination of both. While an expansionary monetary policy includes lowering down the interest rates and increasing the money supply. As interest rate decreases, investment demand increases and thus output increases.

In the lower part of the diagram, contractionary fiscal and moneytary policies are given. If the authorities would not use expansionary policies in the recession and use contractionary policies (fiscal or monetary), then the output would further fall down and recession would get worsen. Then, a country would experience depression.