Question

with the use of Aggregate demand and the short run and long run aggregate supply curve, explain and illustrate how policy marker can use fiscal policy to get the economy out of recession and stop inflation.

Answer 1

To remove economy out of recession the policy maker uses expansionary fiscal policy by reducing taxes and inducing higher spending which thus helps spur consumption and aggregate demand and thus boosts real GDP.

To stop inflation in the economy, policy maker adopts contractionary fiscal policy by reducing government spending and raising taxes which leads to supply freeze of credit and lower disposable incomes and thus consumption slowsdown causing aggregate demand to fall and real GDP and Inflation both to decline.

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