Question

In your role as a business owner or employee and as a private consumer, you are an active participant in the economy. Your consumption and saving decisions have an impact on the economy. Keeping in mind the lessons you learned in the last two chapters about AD/AS modeling please respond to the following scenario:

Assume we are in the beginning stages of a potential recession. With your understanding of the role of money in the economy, what can you do as a participant in the economy to reverse the recessionary trend?

Answer 1

The beginning of the recession shows the indicators such as decrease in aggregate demand, decrease in prices, decrease in aggregate supply and loss of jobs in the economy. As a result, unemployment rate increases and inflation comes down and money supply is also at a reduced level.
In this scenario, as an employer, I will make investment spending and employ people so that they get their wages. It will push the aggregate demand to increase and wages earned will be spent upon the goods and services produced in the economy. As a result, other business owners will also keep producing. People would also like to work at relatively lower wages to support their livelihood. Since the inflation rate is low, the holders of money will start aggressive lending to gain and the supply of money will increase. It will also boost the aggregate demand.
As a private consumer, I will also spend money upon the goods and services as a part of MPC and contribute to increase in the demand in the economy. As a result, more supply will increase and more people will get jobs. Therefore, a chain of positive economic activities will start taking place and the economy will slowly recover from the recessionary stage.