The economy has been suffering through a recession for over a year and the gover

Question

The economy has been suffering through a recession for over a year and the government is desperate for solutions. Elections are coming up and the current administration is in danger of being replaced if something isn The economy has been suffering through a recession for over a year and the government is desperate for solutions. Elections are coming up and the current administration is in danger of being replaced if something isn The economy has been suffering through a recession for over a year and the government is desperate for solutions. Elections are coming up and the current administration is in danger of being replaced if something isn

Explanation / Answer

1.

To increase consumption, government can offer various types of tax exemptions and unemployment benefits to the people. However, the flip side is that these activities might lead to inflationary pressures in the economy.

Increasing investment can also prove to be a better target as increasing investment will lead to increasing lending and consumption.

2.

Government expenditure would increase the budget deficit and national debt. EU countries have seen similar spectra in recent time. Domestic sources of fund for expenditure may produce the some desirable results but in the over the period of time such action would compete for fund in the market with private sector and crowding out effect can be seen and growth would be retarded in the near future.

3.

Fed can reduce money supply in the economy by either increasing the reserve requirements or buy securities in the open market. This will reduce money supply and thus consumption and aggregate demand.

4.

The government can control inflation in the long run by using supply side policies.

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