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The technical economic indicator associated with recession is economic growth which is negative which in quarters is two consecutive when measured by a nation’s GDP (Gross Domestic product) (Skousen 34-36).
Monetary policy means the changes effected in money supply and interest rates in order to contract or expand aggregate demand. During recession, the federal government reduces the interest rates and increase money supply in return. However for monetary policy to be effective the confidence that both the consumers and businesses have in it play a pivotal role. Reduced interests rate may be inconsequential response to recession if the consumers and businesses do not take advantage of the reduced interest rates and increased money supply. This would in return greatly affect the recovery of and flow of money by the federal government.
Fiscal policy means the changes made in regard to taxes and expenditure of the federal government with the main purpose of contracting or expanding aggregate demand level. In reference to recession, fiscal policy is applied when government lowers the people’s taxes and in turn increases its spending. On the other hand fiscal policy may also involve taxing more and spending less. However for this strategy to be effective it largely depends on savings and during imports. If the people save more and the businesses import more then fiscal policy counters recession contrary to the reverse. The reverse which in this case is less saving and importing activity ultimately scuttles recovery measures.
Thirdly, by the federal government increasing its spending and lowering taxes, Automatic stabilizers are activated. This means that the progressive income tax is reduced and this in turn increases aggregate demand during recession thus enabling recovery. On the other hand, aggregate demand decreases in overheated expansion. As a result, the tax and spending changes result to recession deficit
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