When the economy is in a recessionary mode, what will likely be the actions by government using fiscal policy?Is it better to concentrate on aggregate demand or aggregate supply? Why?
Fiscal policy—the use of government expenditures and taxes to influence
the level of economic activity—is the government counterpart to monetary
policy. Like monetary policy, it can be used in an effort to close a
recessionary or an inflationary gap.Certain government expenditure and taxation policies tend to insulate
individuals from the impact of shocks to the economy. Transfer payments
have this effect. Because more people become eligible for income
supplements when income is falling, transfer payments reduce the effect
of a change in real GDP on disposable personal income and thus help to
insulate households from the impact of the change. Income taxes also
have this effect. As incomes fall, people pay less in income taxes.
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