Question

What is the main reason for employing expansionary fiscal policy during a recession?

Short answer

The main reason for employing expansionary fiscal policy during a recession is to stimulate economic growth and reduce unemployment by increasing aggregate demand through government spending and/or lowering taxes. This boosts consumer and business spending, leading to increased economic activity and recovery.

Step-by-step solution

Definition of Expansionary Fiscal Policy

Expansionary fiscal policy is a type of economic policy that aims at increasing aggregate demand in an economy by increasing government spending and/or reducing taxes. This policy is used to stimulate economic growth and reduce unemployment during an economic downturn or recession.

Recessions and the Need for Economic Stimulus

Recessions are characterized by a decrease in economic activity, a higher unemployment rate, and reduced consumer and business spending. To counteract these conditions, expansionist fiscal policies help to stimulate demand and output, thus minimizing the negative effects of an economic slowdown.

Main Reason for Expansionary Fiscal Policy During Recessions

The main reason for employing expansionary fiscal policy during a recession is to stimulate economic growth and reduce unemployment. It does this by increasing aggregate demand through government spending on public works, infrastructure, and other areas, and/or by lowering taxes, which puts more money in consumers and businesses' hands. As a result, economic activity increases, businesses start hiring again, and overall unemployment decreases, leading to economic recovery.