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.Explain how can we use fiscal and monetary policy if we have a very serious depression...

.Explain how can we use fiscal and monetary policy if we have a very serious depression in the country. ( country is bot important it is general )
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Answer #1

Expansionary fiscal policy and expansionary monetary policy can be used to come out of the situation of depression.

EXPANSIONARY FISCAL POLICY: This is done either by increasing government spending or decreasing tax rates. It shifts the IS curve from IS to IS'. The output level increases from Y1 to Y2.

EXPANSIONARY MONETARY POLICY: This is done by reducing interest rates. So that people spend more and more money circulates in the economy. It shifts LM to LM'. The output level increases from Y1 to Y2.

This two policies can be used simultaneously to have bigger impact on the economy.

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