Fiscal Policy

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When the economy is in a recessionary mode, aggregate demand shifting inward is often the culprit. Deflationary pressures on prices ensue, and output falls, causing problems like higher unemployment and contraction of the economy.

When the economy is in a recessionary mode, what will likely be the actions by government using fiscal policy? Is it better to concentrate on aggregate demand or aggregate supply? Why?

Review how and why aggregate demand and aggregate supply shift inward and outward. English economist John Maynard Keynes developed a model that provides an explanation for the high and prolonged rate of unemployment of the Great Depression. According to Keynes, what are the major sources of economic instability? Fiscal policy is spending and taxation of the executive branch of the federal government; in recessionary times, what initiatives in spending and/or taxation are going to help the economy?

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