Question

How might the government react to a downturn in the economy?

Answer 1

An economic downturn suggest the rate ofeconomic growth is slowing down and possibly entering into recession. A downturn is part of theeconomic cycle (sometimes referred to as trade cycle or business cycle). The government react to a downturn in the economy by might take steps to stimulate the economy.

Answer 2

The correct answer is: "One posible intervention could be an expansionary fiscal policy".

An economic downturn is a period of recession and low economic growth, or even negative growth figures, that usually comes together with high unemployment rates.

In order to boost the economy and the aggregate demand levels, the goverment can use the fiscal policy, more specifically it needs to use the expansionary version. It consists on increasing public spending for example, to create job positions for the unemployed, so that these can start earning an income and demanding goods and services themselves, therefore increasing aggregate demand levels and total output and, therefore, generating economic growth.