Question

Which statements best describe how governments respond to changes in the business cycle? ---List all that apply---

Answer 1

The following are possible policies that goverments might choose in response to changes in the business cycle:

• Governments make currency more available. This tecnique is generally used to cope with recession or deflation periods. Its implementation needs to be properly controlled as it can lead to inflation and price inestability. It is one the mechanisms used to establish a expansionary monetary policy.
• Governments change their policies (examples: the policies mentioned in the other options)
• Government reduce spending. When there is public deficit (generally after big recessions when public money is spent to boost the economy) goverment might choose to cut some expenses to reverse the deficit situation.  
• Governments manipulate interest rates. If interest rates are lowered, this is an expansionary monetary policy tecnique, aimed to boost demand and production and to decrease unemployment in recession periods. If interest rates are set higher, it might aim to stabilize a high inflation period.

Answer 2

Governments make currency more available

Government change their policies

Governments manipulate interest rates