Answer to Question #203413 in Macroeconomics for Sadiya

Question

Questions A [30 marks]   

Assume the economy is in a recession. Explain how each of the following policies would affect consumption, investment and national income (GDP). In each case, indicate any direct effects, any effects resulting from changes in the macroeconomic variables and the overall effect in the economy. If there are conflicting effects making the answer ambiguous, say so. 

1. How fiscal policy influences aggregate demand and how these can be used to expand the economy? [15 Marks] 
2. How monetary policy influences aggregate demand and how these can be used to expand the economy? [15 Marks] 

Answer 1

Question 1:

When an economy is in a recession, consumption tends to fall since individuals prefer saving money because there is a fall in confidence, investment and national income (GDP) goes down too since most entrepreneur would opt selling their assets and focusing on safer ventures. The reduced investment leads to reduction in the country's GDP

QUESTION 2

Monetary policy is usually put by central banks by playing with money supply in an economy. This leads to incentives for banks to loan and businesses to borrow. Through debt-funded business, consumer spending and investment through employment, is affected positively hence increasing aggregate demand.