Question

The US decided to spend it's way out of the recession and England decided to cut spending. Compare and contrast the two ways to deal with the recession: austerity or spending, reducing interest rates and QE.

Answer 1

Government role has been recognized as prime savior when recession affects economy. Recession is characterized by fall in the aggregate demand. Fall in aggregate demand drives down output and employment levels. Recession can be dealt if government raises the level of spending in economy. Spending raises the aggregate demand. Thus, Spending its way out of recession would be right policy to tame over recession. same policy was pursued by the USA to deal with economic crisis of 2008.

England cutting spending will not be able to deal with recession. Cut in spending will further, leads to fall in the aggregate demand. so problem of recession will become more acute.

Reducing interest rate and quantitative easing are also right course of actions. These measures reduces the interest rate and thereby raises the level of investment and consumption spending. So eventually Aggregate demand rises.

But US expenditure is still high even though economy is out of recession. Such behavior of government must be restrained to avert imminent crisis. During the boom period, government deficit must be low so that any potential crisis can be countered easily.