Question

The economy is in a recession and cyclical unemployment is rising. Propose a fiscal policy action for job creation and economic recovery. In your response, use AD-AS model to discuss the effect of your policy action on Real GDP and Price Level.

Answer 1

To combat recession and rising unemployment government can take up infrastructure projects that provide temporary employment to a large number of people. Besides, it can build more schools colleges hospitals that will hire permanent staff and help in job creation. This involves government spending on these services so the government expenditure increases. This is likely to shift the aggregate demand to the right. Gradually, the recessionary gap is eliminated as real GDP and price level both are increased to their full employment level