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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

What is the main reason for employing expansionary fiscal policy during a recession?

To determine

The reason for employing an expansionary fiscal policy during a recession.

Explanation

An expansionary fiscal policy of the government refers to use of government spending to increase the aggregate demand, output, employment and prices in the economy. It includes:

  1. cuts in business taxes to increase after tax profits,
  2. cuts in individual income taxes to increase the disposable income and hence to increase the consumption,
  3. increasing government purchases of final goods and services to increase aggregate demand directly.

Consider the diagram below. Here,

AD = Aggregate Demand

AS = Aggregate Supply

P = Price level

Initially, the equilibrium output is Q0and the equilibrium price is P0. Initially, the economy is at a low level of equilibrium because of recession...

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