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TRUE OR FALSE AND EXPLAIN WHY: When there is a recession due to insufficient aggregate demand,...

TRUE OR FALSE AND EXPLAIN WHY: When there is a recession due to insufficient aggregate demand, the central bank can always use monetary policy to stimulate demand. Expansionary fiscal policy is unnecessary.

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Answer #1

Answer : The answer is "True".

In case of recession the Central Bank use expansionary monetary policy. As a result, money supply increase in the economy and people get more money on their hand to spend. This increase the aggregate demand which shift the AD (Aggregate Demand) curve to rightward. As a result, the recession become eliminated. Thus Central Bank use monetary policy to stimulate the demand. If Central Bank use monetary policy to eliminate the recession then expansionary fiscal policy become unnecessary. Therefore, the given statement is true.

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