When recessions are the result of slowing growth in potential output, the government's best response is a policy to:

Question

Quizplus · Accepted Answer

When a recession is caused by slowing growth in potential output, it means that the economy is not producing goods and services at its full capacity. In such a scenario, the government's best response is to implement policies that promote saving and investment. This can help increase productivity and potential output in the long run, which will strengthen the economy's capacity to generate sustained and stable growth in the future. Policies to increase aggregate demand, like fiscal or monetary stimulus, may alleviate the immediate symptoms of the recession but may not address the root cause of the problem. Similarly, reducing government spending may cause a further contraction in demand, worsening the recession.

When Recessions Are the Result of Slowing Growth in Potential