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What fiscal and monetary policies may policy-makers implement to offset the effects of the decrease in...

What fiscal and monetary policies may policy-makers implement to offset the effects of the decrease in demand?

Why could it be better to leave the economy alone for it to self-correct?

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Answer #1

Answer - The expansionary fiscal and monetary policies will be needed to reduce the effect of decreased demand.

The monetary policies like the decrease in reserve ratio , purchase of government securities in open market will increase the supply of money in the economy , raise the AD.

Fiscal policies like increase in government spending and decrease in taxes will also increase consumption and investment and boost the demand in economy.

Yes , it is better to leave the economy to self correct. This is because through the automatic stabalisers the economy will settle at equilibrium , but the expansionary policies will result in the inflation in economy and reduce the value of currency. Hence automatic stabalisers will be better.

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