Question

In 2012, hurricane sandy caused massive destruction to the northeast united states. tens of thousands of people lost their homes and possessions. even those who weren't directly affected by the destruction were hurt because business failed or contracted and jobs dried up.

Answer 1

In this case, the economy had been suffering from a recession leading to lower output, aggregate demand and real GDP. The government can boost the economy by engaging in expansionary fiscal policy.

Government can implement expansionary fiscal policy by increasing government spending on goods and services, which will directly increase aggregate demand, thus boosting income and real GDP. Alternatively the government can lower tax rate. When individual tax rate falls, personal disposable income rises, increasing consumption demand and aggregate demand. When business tax rate falls, corporate net profits rise, which encourages firms to invest more in expanding their output. Higher investment by corporate firms increase aggregate demand.