Discuss What Government Policies Can Be Used to Overcome

Discuss what establishment policies can be exercised to overpower a recession A recession is two or more(prenominal) consecutive quarters of a year that experiences a decline in GDP or has negatively charged GDP growth recessions are believed to be casefuld by a widespread fall in spending. Employment, investment, household incomes and caper profits all fall during recessions while bankruptcies and the unemployment rate rise.Governmennts respond to recessions by adopting expansionary stinting policeys such(prenominal) as the expansionary fiscal policey or loose pecuniary policey. The exapansionary fiscal policey involves the government attempting to sum up core enquire, the two main instruments the government use to achieve this is government spending and taxation.The government annexs its spending in the economey which stimulates the economey through the multiplyer topic, this huge sum up of government spending acts as an barb into the circular flow and go out eventua lly increase consumer incomes which give increase the consumers bare(a) propensity to consume which will consequently shift sum of gold assume to the objurgate as all of this additional income is being spent, this right field shift will wherefore lead to an increase in economic growth, this is shown on the graph below.The government can overly hang taxes such as VAT which will also increases consumer spending as it will make consumers have more disposable income therefore acting as an incentive for them to consume, do summation demand to shift to the right causing growth, the government can either increase spending or return taxes or even apply both to the economy.However the effect of the fiscal insurance will be on how much money is pumped into the economy and how much the taxes have been reduced because if government spending has increase by a small percent or taxes have decreased a small percent it may not have much of an effect on the consumer marginal propensit y to consume and so may smash to increase aggregate demand. Also depending on the inflation rate in the economy already the fiscal insurance could cause the price direct to increase due to a major increase in aggregate demand as shown in the graph above.Also the policy could cause displace out because if the increase in government spending is raised from taxes then it would lead to a reduction in snobby spending and if the increase is financed by borrowing then it could lead to a rise in interest grade which would lead to a decrease in private investment. There will also be a time lapse involved as the government will have to wait for the multiplier effect to kick in and so in the short frontier this policy may prove ineffective however in the retentive term its effectiveness will show.Another policy the government can use is the expansionary fiscal policy, the expansionary monetary policy aim to shift aggregate demand to the right by lowering the interest place, the lower ing of the interest rates lowers the cost of borrowing for example using credit cards and decreases consumers marginal propensity to save which therefore encourages consumption. These lower interest rates also encourage firms to borrow and invest therefore further increasing aggregate demand in the economy.These lower interest rates will therefore increase aggregate demand shown in the graph below. This increase in aggregate demand will therefore increase GDP as shown in the graph above. However the amount the government can decrease the interest rates by will depend at what train they are at already, for example the interest rate for the UK at this irregular of time is 0. 5 and so the government would not realistically be able to decrease this any more and so the monetary policy would prove ineffective in this situation.So if the decline in interest rates does not work the monetary policy uses the tool of qauntative easing which is were the MPC monetary policy committee creates m oney through merchandising bonds, buying banks assets and marketing loans to other banks, this money is then spent in sectors of the economy which will act as an injection into the circular flow, this will then again generate growth as it will cause aggregate demand to shift outwards.This increase in cash reserves due to the selling of bonds and so on will also mean banks will increase their lending to households and businesses which will again make it easier for people to obtain money and therefore consume therefore shifting aggregate demand to the right causing and increase in growth.Although the use of this policy could also cause inflation as shown in the graph above, the MPC also predict the future economic trends so the policy can be used at full effect and so if the prediction is wrong it could have negative effects on the economy, furthermore the effect of the qauntative easing will depend on how much the MPC is actually able to obtain through bonds, selling loans and ac quiring bank assets.