Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best interest of the economy to increase government spending in defense, education & infrastructure.
The President and Congress change the budget accordingly, but after 18 months, GDP only increased by three quarters of the expected amount. What factors might be responsible for this situation?
Material for references is: Economics,Principle, Applications, Tools 5th ed. O'Sullivan/Sheffrin/Perez. Chapters 10,14.
//First of all we will understand about the microeconomic policy and its usefulness. Microeconomic policy gives a flexible economic structure which helps in grasping the opportunities available in the market. The success of the economy depends upon the efforts made towards the structural reform. We all are aware of the downturn in the global economy & financial crisis taken place in U.S. The economy is in the recession phase and it is necessary to take immediate action for the stabilization of the economy. Now, let's understand the concept of recession and its implications as it will help in identifying the appropriate measures to fight recession.
Recession can be defined as the situation where GDP of a country declines continuously for two or three years. The slow down in the economy from several quarters results in the recession. Recession is caused due to the economic cycle. After experiencing strong growth for some years, there is a decline in the growth rate. Generally, it is seen that an economy expands for six to ten years and then enter recession phases which may vary from six months to two years.
Another reason for recession is lack of confidence among consumers and decrease in the overall spending. This results in fall down in the demand of goods & services, thus leading to decline in the production, employment opportunities and job cuts. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors also fear to spend in stock markets due to the expectation of decline in the stock values (What's a recession...2008).