Question

If the stimulus above is insufficient, propose a stimulus package that would be "exactly" sufficient to bridge the GDP gap. the government's budget deficit had increased during the recession (partly through automatic fiscal stabilization), many conservatives argued for the urgent need to reduce governmer owever, liberals argued that rushing such austerity measures may not contribute much to reduce the deficit because they may hurt the recovery. Explain

Answer 1

First of we need to understand what recession is? Recession is period of business cycle contraction when there is a general decline in economic activities. Indicators such as GDP, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.

So if in this type of situation even though government is facing cash crunch or the fiscal deficit is increasing the government need to keep on investing and spending more on productive activities so that there will be more of employment creation which will in turn boost up household income and which in turn will generate household spending and so on. The slowly the economy will revive from that conditions.

Now if the the government stops spending all these money so there will be no job creation and which in turn effect household income and the economy will go much deeper in recession. Therefore the government so keep on taking measures as well as keep on creating and spending money cautiously. And wait for auto revival of economy.