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Discussion Recessionary mode

label Business & Finance
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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?

Mar 24th, 2015

Question:

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?

Answer:

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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Mar 24th, 2015

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