What can Congress do to help the economy recover from a recession? Explain the tools they would use and what they are expected to do, as well as reasons why it may not work as expected.
ANSWER:
GIVEN THAT:
1. The interaction of AD and AS determines the level of price and real GDP in the economy.
2. When the employment is less than its full employment level, there is a recessionary gap where unemployment rate exceeds its natural rate.
3. In such a case an increase in aggregate demand is required. Government can reduce the income tax rates or it can increase its spending on goods and services. Both are the measures of fiscal expansion and they stimulate aggregate demand.
4.Eventually, after the multiplier effect has taken place, real
GDP reaches its potential and level and employment also reaches its
full employment level.
5.Primarily it is less effective than monetary policy when it comes
to the task of recognizing and implementing the policy. There is a
delay in presenting the proposal and getting it accepted.
6.Then there is a delay in its implementation by the bureaucracy.
7.Secondly there are mandatory spending such as social security, Medicaid, Medicare, unemployment insurance which have to be home by the government irrespective of its budget deficit.
8.In case of a recession, an already swelled up budget deficit poses a problem of further fiscal expansion and forces the government to run a balanced budget.
What can Congress do to help the economy recover from a recession? Explain the tools they...
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