In working to correct a recession with fiscal policy,the government can:
A) wait for wages and prices to become more flexible.
B) increase the money supply.
C) increase its expenditures and/or decrease taxes to shift the LRAS curve.
D) raise its expenditures and/or lower taxes to increase aggregate demand.

Question

Quizplus · Accepted Answer

The best choice to correct a recession with fiscal policy is to raise government expenditures and/or cut taxes to increase aggregate demand. This will shift the AD curve to the right, increasing output and reducing unemployment. Waiting for wages and prices to become more flexible (A) would take too long and may worsen the recession. Increasing the money supply (B) may lead to inflation or may not even stimulate spending if people choose to save the extra money. Shifting the LRAS curve (C) does not directly address the issue of deficient aggregate demand leading to a recession.

In Working to Correct a Recession with Fiscal Policy,the Government