Question

What type of fiscal and monetary policy could be used during a recession period to stimulate the economy of a country (e.g., Spain, Cyprus, Mauritius, Italy, Malta, etc.) which heavily relies (dependent) on tourism?

350 words.

Answer 1

During a recession, the most effective policies are expansionary fiscal policy and expansionary monetary policy. We know that fiscal policies are controlled by the government and they use the tools of government spending and taxations. On the other hand, monetary policies are controlled by central banks and they make changes in the money supply by making changes in the interest rates (interest rates are the rates at which money is lent).

Expansionary fiscal policy is effective at the time of recession and it involves increases in government spendings and a decrease in taxes. This stimulates the economy and gives a boost to its production, consumption, and growth. On the other hand, in an expansionary monetary fiscal policy that is controlled by the central bank, the interest rates are decreased, to increase the money supply in the economy. With lower interest rates, investments will be more, savings will be less and consumption will be more. Thus, an economy at a recession will get a boost.

When the country uses expansionary monetary and fiscal policies, there is an increase in the development of various sectors of the economy, including infrastructure, transportation etc. This will give complimentary support to other sectors like tourism.