Expansionary monetary policies

Question

Logically explain how expansionary monetary and fiscal policies help in avoiding recession

Answer 1

Hildana,

If the economy is in a recessionary gap the appropriate fiscal policy is expansionary and for the government to increase government spending or reduce taxes. If either or both of these are done then Government spending &/or consumption increases. which shifts AD rightward returning us back to full employment. Monetary Policy need to be expansionary increasing the Money Supply and lowering the Nominal Interest Rates which would increase investment and again shifting AD rightward returning us back to full employment. Send me a quick note and I'll send you a cheat sheet.

Cheers,

Charles