Question

The next time the economy falls into a recession, there will be a spirited debate about whether the government should try to counteract the downturn, or whether it is better to let the economy run its course. Most likely, there will some action taken to try to improve the economy. Then the debate will turn to what tools the government should use to fight the recession. In this week's discussion we will focus on (1) what role the government should play in stabilizing the economy, and (2) what tools they should use if the government does step in. Please respond to the both of the following questions in your initial post:

1. Assume the economy has entered a recession and policymakers are debating whether to intervene or not. What are arguments in favor of and against active government intervention to fight recessions? Be sure rely the  economics we learned this week in your summaries.
2. Now assume that the decision has been made to try and fight the recession. Based on the economics we learned this week, provide a recommendation to policymakers about how they should fight the recession. That is, in your professional economic opinion, what is the best approach? You may want to consider the following in your response. Should we use fiscal policy, monetary policy, or both? Should we use tax cuts, increased spending, or both? Who should get the biggest tax cuts to stimulate the economy - poor vs rich, evenly across income groups? Be to explain why you believe your recommendation is the best, again, using the economics you have learned.

Answer 1

Explanation:-

1)

John Maynard Keynes was the first to advocate an active role for Government in fighting recession.Government intervenes in the economy by cutting taxes and rising public expenditure.Following reasons explain why government intervention is necessary to combat recession.

> Tax cuts increase disposable income in the hands of investors and consumers.

> Consumption and investment management will rise resulting in an increase in aggregate demand.

> It is more helpful to minimise the damage caused by Natural economic events.

> Disadvantaged sections of the society will be suffering from the devastating impact of recession.Government provides them aid via social security measures.

> Government will spend in infrastructure development in general which will fasten the recovery process.

Arguments against government intervention are as follows.

> Taxcuts and Increased public expenditure will lead to government deficit.

> Prolonged deficit will increase debt burden.

> Prices will rise due to excess money supply created by taxcuts and public spending

> Government spending will crowd out public spending

> Due to increased debt, foreign dependence will increase and independence in policy making will be lost

2)

In order to overcoming we should use a policy mix. Expansionary monetary policy along with expansionary fiscal policy can be implemented.

> Central Bank should rise my money supply with the help of the quantitative and qualitative instruments at its disposal.

> With the rise in money supply, consumption will rise.

> When borrowing becomes less costly, investment activities will be stimulated. If tax concessions are provided,it will further boost investment in the economy

> Production will rise along with the aggregate demand leading to More employment opportunities.

> But there will be certain areas neglected by the private . Government will have to spend in those areas.

Eg)providing social security measures like unemployment benefits, scholorships etc

> As incomes , investment etc increases, Economy will be back on track.

> So what we need is fiscal and monetary prudence. Government along with the central bank making effective use of monetary policy and fiscal policy will be able to revive Economy from recession .

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