Question

You suspect a recession is coming. What options does Congress have to alter the course of the economy? What are some potential problems and pitfalls in the implementation of their choices

Answer 1

Economic recession occurs where aggregate demand fall in economy and which result into fall in growth rate and employments. Government uses fiscal policy to deal with economic recession. Following are alternatives with congress:

• Increase in government expenditure in advance
• Reduces the taxes.

Both combinations of increase in government expenditure and reduction in taxes would invariably lead to rise in aggregate demand. Although expansionary fiscal policy is quite effective in dealing with recession but the owing to lag effects in implementation or execution of fiscal are larger, due to these effects, there might be undesirable result.