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Monetary and Fiscal Policies on Recession - Research Paper Example

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In the paper “Monetary and Fiscal Policies on Recession” the author evaluates recession as a phase experienced by countries as a result of changes in the cycle of the economy. Fiscal policy is used by governments to stabilize aggregate demand and aggregate supply in the economy…
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Monetary and Fiscal Policies on Recession
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Monetary and Fiscal Policies on Recession

Download file to see previous pages... As a result, the rate of unemployment goes up reducing the purchasing power of consumers. Consecutively, money supply in the economy becomes significantly low (Navarro, 2009).
Fiscal policy is used by governments to stabilize aggregate demand and aggregate supply in the economy by influencing the government spending, borrowing and taxation. The government uses fiscal policy to change the patterns of people’s spending. According to Keynesian school, fiscal policy helps restore employment rates, demand and output where the economy is operating below capacity. Keynesian recommends two types of fiscal policies; expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy is used where the government requires deficit spending in case of recession while contractionary fiscal policy is used when there is an excess expansion which requires a surplus in the budget (Renee, 2009).
Monetary policy is another tool used to manage the aggregate demand and supply by controlling the supply of money in the economy. The government uses the central bank to control growth, liquidity, inflation and consumption due to changes in the amount of money in the economy. The Federal Reserve System responds to excessive money supply by raising the interest rate and lowers the interest rates when there is low money supply in the market (Borio & Disyatat, 2010).
The Great Recession of 2008 presented severe economic conditions in the US and also in other countries. Furthermore, the recession was associated with elongated economic slumps and slow economic recoveries. After recession, most of the world economies went into depression and this caused a large gap in the recovery of the currency, as the developing countries have weaker currencies compared to the developed countries. ...Download file to see next pagesRead More
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