Question

Suppose that the economy is suffering from a recession (or type of economic downturn). Businesses are closing, and people are losing their jobs. In 1 or 2 sentences, list two fiscal policy actions that could help the economy to recover faster.

Answer 1

One fiscal policy action is for the government to spend more money on public goods, such as building roads. [ Another fiscal policy action is for the government to lower taxes and put more money into the hands of individuals (to increase consumer spending). ]

Answer 2

In a situation of economic recession, where unemployment is rising and companies are closing, the government can use an expansionary fiscal policy to stimulate the economy. This can be done by increasing government spending and reducing taxes on productive activity. The government is a powerful consumer and as it increases its spending, it pours money into the economy and warms the market. In addition, by reducing taxes, the government encourages the productive sector to increase production and contract. Thus the economy can grow back into a virtuous cycle.