In: Economics
Economy in recession is shown by the following diagram.
Now, the following diagram is showing Keynesian approach to solve the problem.
As per the Keynesian approach, government either increases the
spending or reduces the taxation. With increase in spending, the
demand increases. It is now catered by new supply by the firms and
while doing so, firms create new jobs. It increases the purchasing
power and people spend more to increase the demand. Further, it is
catered by supply of the firms and jew jobs are created again. It
initiates a chain of positive economic activities and demand is
stimulated and shifted to the right to achieve long run equilibrium
as shown above.