As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to
A)shift the AD curve to the left by decreasing tax rates.
B)shift the AD curve to the right through large increases in government spending.
C)increase potential GDP.
D)shift the AS curve to the right through large increases in government spending.
E)shift the AS curve to the left by increasing wage rates.

Question

Quizplus · Accepted Answer

Governments aimed to shift the AD curve to the right through large increases in government spending to stimulate demand and boost economic activity during the recession. This policy response is known as expansionary fiscal policy. A decrease in tax rates might also boost demand but would be less effective during a recession when people may choose to save rather than spend. Increasing potential GDP through long-term structural reforms and investments also remains important, but government spending was the most effective short-term response to the recession. Shifting the AS curve cannot be achieved through government spending alone and would require structural reforms, supply-side policies, or changes in market conditions. Increasing wage rates would shift the AS curve to the left, reducing output and increasing inflation, which would be counterproductive during a recession.

As a Global Recession Began in Late 2008, the Governments