Discuss What Government Policies Can Be Used to Overcome a Recession

Topics: Inflation, Macroeconomics, Monetary policy Pages: 3 (815 words) Published: November 30, 2012
Discuss what government policies can be used to overcome a recession

A recession is two or more consecutive quarters of a year that experiences a decline in GDP or has negative GDP growth; recessions are believed to be caused by a widespread fall in spending. Employment, investment, household incomes and business profits all fall during recessions; while bankruptcies and the unemployment rate rise. Governmennts respond to recessions by adopting expansionary economic policeys such as the expansionary fiscal policey or loose monetary policey.

The exapansionary fiscal policey involves the government attempting to increase aggregate demand, the two main instruments the government use to achieve this is government spending and taxation. The government increases its spending in the economey which stimulates the economey through the multiplyer effect, this huge increase of government spending acts as an injection into the circular flow and will eventually increase consumer incomes which will increase the consumers marginal propensity to consume which will therefore shift aggregate demand to the right as all of this additional income is being spent, this right shift will then lead to an increase in \economic growth, this is shown on the graph below.

The government can also decrease taxes such as VAT which will also increases consumer spending as it will make consumers have more disposable income therefore acting as an incentive for them to consume, causing aggregate demand to shift to the right causing growth, the government can either increase spending or decrease taxes or even apply both to the economy. However the effect of the fiscal policy will depend on how much money is pumped into the economy and how much the taxes have been reduced because if government spending has increase by a small percent or taxes have decreased a small percent it may not have much of an effect on the consumer marginal propensity to consume and so may fail to...
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