Discuss What Government Policies Can Be Used to Overcome a...

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.†¦show more content†¦Also the policy could cause crowding out because if the increase in government spending is raised from taxes then it would lead to a reduction in private spending and if the increase is financed by borrowing then it could lead to a rise in interest rates which would lead to a decrease in private investment. There will also be a time lag involved as the government will have to wait for the multiplier effect to kick in and so in the short term this policy may prove ineffective however in the long term its effectiveness will show. Another policy the government can use is the expansionary monetary policy, the expansionary monetary policy aim to shift aggregate demand to the right by lowering the interest rates, the lowering of the interest rates lowers the cost of borrowing for example using credit cards and decreases consumers marginal propensity to save which therefore encourages consumption. These lower interest rates also encourage firms to borrow and invest therefore further increasing aggregate demand in the economy. These lower interest rates will therefore increase aggregate demand shown in the graph below. This increase in aggregate demand will therefore increase GDP as shown in the graph above. However the amount the government can decrease the interest rates by will depend at what level they are at already, for example theShow MoreRelatedThe Great Recession Of 20081691 Words   |  7 PagesProfessor Demiray Economics 200 October 18, 2015 Great Recession of 2008 The Great Recession in 2008 led to a huge crisis in the United States economy. This recession almost led to the entire collapse of the United States economy due to the constant unstable changes in legislation, regulation, along with the changes in fiscal and monetary policies. Furthermore, many economists believe that the increase of excess monetary and government irresponsibility led to the overall crisis in the mid to lateRead MoreEconomic Policies And Economic Policy1096 Words   |  5 Pagesevery country there s a government and economy. Each counties government helps or tries to help recover, stabilize, and grow the economy. First thing we need to look at is economic policy. 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