Explain using words only no diagrams how government includin

Explain using words only, no diagrams, how government (including the Federal Reserve) will tend to fight a recession. In your answer, identify the three policy tools government will tend to use, and explain why Keynes thought one of these tools might work better. (15 points) 9.

Solution

In a recessionary situation the aggregate demand in the economy will be very low so the government should focus on increasing the aggregate demand. The governmeny got three fiscal policy tools to control the economy and they are taxation, public expenditure and borrowing.

In a recession, the would increase the government spending, borrowing and decrease the taxation. The decrease in the taxation would increase the disposable income of the income so when the disposable is increased the people will spend more and it will raise the aggregate demand in the economy. When the government spending increases, it adds to more in the hands of people so they consume more and aggregate demand in the will rise.

Keynesian thought the government spending will work better because of the multiplier effect, the initial rise in the government expenditure will tend to rise the income much more.