Answer to Question #307116 in Macroeconomics for topaztee

Question

Explain why an expansionary fiscal policy is more appropriate when the economy is in recession. Support your discussion with examples.

Answer 1

Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP.

Policy like changes in spending or taxes, shifts the aggregate demand outward and puts money in people's hands.