Using what you have learned in this unit, choose a FISCAL policy that you would recommend to help an economy that is in a recession. You should not choose a monetary policy (i.e. interest rate manipulation, selling of bonds, or printing of money).
Explain how your policy would help increase aggregate demand. That is, does it increase C, I, G, or X?
Explain what would happen to prices (i.e. inflation).
You may use either the Modern Keynesian model or the Classical Model to conduct your analysis. Just be sure to note which one you are using.
Suggested Guide Outline:
Setting Fiscal Policy
A. What is fiscal policy?
B. Recession and inflation
C. Increase C, I, G, or X
D. The Keynesian model
Suggested Write up:
A. Fiscal policy
Fiscal policy is the deliberate alteration of government spending or taxation to help achieve desirable macro-economic objectives by changing the level and composition of aggregate demand (AD) (Economics Online, 2013).
B.Recession and Inflation
A recession is characterized by "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales" (Investopedia, 2009).
It is also said that there are a lot of factors that contribute to an economy's fall into a recession, but the major cause is inflation ...
The solution identifies a fiscal policy that will help the economy during recession. The Keynesian model was used in this simple analysis.