Question

Explain how government is necessary?

Answer 1

In marcoeconomics the government plays a balancing act.

During economic growth, i.e increasing AD, which may sound like a good thing for the economy is not always so. This often leads to increasing inflation private players are neither motivated nor rewarded to indentify and correct a booming economy past it's full employment. The government takes the matter to the hand and using counter cyclical fiscal policies such as increasing tax and reducing government expeditures helps in preventing a scenario of hyper inflation.

Similarly during a recession as prices and output go down to revive the economy the government increases government sepbding and/or decreases tax to help boost the economy and counter recessionary gap.