Question

During the 2008 crisis, the Eurozone countries applied different strategies to prevent a fall in the aggregate demand.
Provide two examples of fiscal policies in face of an economic crisis and discuss their positive and negative effects on the aggregate demand. Use the concepts of “multiplier effect” and “crowding-out effect”

Answer 1

Two fiscal policies that can be applied in the time of recession in the market are lowering of the taxes and increasing the government purchases.

For example, to deal with recession the government will increase the purchases that will increase the output in the market by the multple of the actual amount spend, at this point the crowding out will be less because market have the excess capacity.

Other policy in the market will be to reduce the taxes, this will increase the disposable income and increase the demand in the market, here, there will be no crowding out and output will increase in the multiple.